If you stop paying a private student loan, your lender will almost certainly turn your delinquent account over to a collection agency. The federal government, although endowed with greater debt recovery options than any private lender, also uses collection agencies when collecting unpaid education loans. You have several options to choose from should a collection agency contact you about your defaulted student loan.
Pay In Full
Regardless of whether you owe a private or federal student loan, your debt remains valid until you pay it in full. Because student loans carry interest charges, the Fair Debt Collection Practices Act allows collection agencies to continue adding interest and fees to the account the longer it remains unpaid. Your best option, if you can afford to do so, is to pay off the student loan in full. Even if you cannot afford to pay off the entire balance at once, contacting the collection agency and negotiating affordable monthly payments help you avoid more aggressive collection activity, such as a lawsuit.
Settle the Debt
One of the primary tools in a collection agency's arsenal is the ability to offer consumers debt settlement programs. A settlement program allows you to pay off the defaulted debt for less than the total balance you owe. The U.S. government typically refuses debt settlement offers on federal student loans because of its ability to force you to pay through garnishment and intercepting your tax refunds. Private student loans, however, do not possess the same collection powers as the federal government, and a collection agency representing a private lender will often be more open to a settlement offer. Even though you cannot settle a federal student loan, you can request that the collection agency eliminate excess fees and interest charges.
Dispute the Loan
In certain situations, you can dispute your responsibility for repayment and have your student loans discharged. Each private lender has its own requirements for a liability discharge that should be stipulated within your original loan contract. Even if a collection agency is responsible for your loan, you can contact the U.S. Department of Education directly and dispute your responsibility for repayment of a federal student loan. The federal government will discharge your liability if you never applied for the loan, you suffered a permanent disability or your school closed before you were able to obtain your degree.
File for Bankruptcy
Contrary to common belief, bankruptcy is an option for some individuals when faced with a defaulted student loan in collections. If you can prove that making payments to the collection agency would deprive you of a minimal standard of living and that your financial circumstances are not likely to change, you can file an undue hardship petition with the court. The bankruptcy judge is ultimately responsible for deciding whether or not your financial distress is severe enough to merit discharging your student loans through bankruptcy.
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