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Can Student Loan Debt Now Be Sent to Debt Collectors?
by
JG Wentworth
•
June 4, 2025
•
6 min
In recent years, the student loan landscape has undergone significant changes, particularly for borrowers struggling with repayment. One of the most consequential developments is the new system for handling defaulted student loans. If you have student loan debt and are concerned about this significant change, you’ll want to understand how borrowers in default will now be referred to debt collections, the implications for borrowers, and strategies for navigating this challenging situation.
Understanding the new referral process
The Department of Education has implemented a revised framework for handling federal student loans that fall into default. When borrowers miss payments for 270 days (approximately nine months), their loans are officially considered in default. Previously, there was a more forgiving transition period, but under the new system, defaulted loans are now being referred more promptly to debt collection agencies.
This streamlined process means borrowers have less time between entering default status and facing the aggressive collection tactics that third-party debt collectors often employ. The transition occurs through an automated system that flags accounts in default and initiates the transfer to collections.
Timeline for collection referrals
The new process follows this general timeline:
- Warning phase: Borrowers receive multiple notifications as they approach the default threshold.
- Default declaration: After 270 days of missed payments, the loan is officially in default.
- Transfer period: Within 30-60 days of default, the loan is transferred to a collection agency.
- Collection activation: The assigned agency begins active collection efforts within 15 days of receiving the account.
This accelerated timeline gives borrowers less breathing room than the previous system, which often had administrative delays of several months between default and active collections.
Expanded powers for collection agencies
Debt collection agencies working with federal student loans now have enhanced authority to pursue repayment, including:
- Wage garnishment: Collection agencies can now more quickly implement administrative wage garnishment, taking up to 15% of disposable income directly from a borrower’s paycheck.
- Tax refund seizure: The Treasury Offset Program allows for the interception of federal tax refunds without requiring a court order.
- Social security offset: For older borrowers or those on disability, up to 15% of Social Security benefits may be withheld.
- Enhanced skip tracing: Collectors have access to more sophisticated tools for locating borrowers who may have moved or changed contact information.
- Credit reporting: Default status is reported to all major credit bureaus, potentially affecting credit scores for up to seven years.
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Financial and legal implications
The consequences of this new system extend beyond the immediate financial strain:
- Credit score impact: Defaults can reduce credit scores by 60-100 points, affecting borrowers’ ability to obtain housing, employment, or other financial services.
- Increased total debt: Collection fees of up to 25% may be added to the original loan balance, substantially increasing the total amount owed.
- Legal proceedings: In some cases, the Department of Education may authorize litigation against borrowers with significant balances in default.
- Professional license restrictions: Some states still allow for professional license suspension for defaulted borrowers in certain fields.
Who is most affected?
The new collection referral system disproportionately impacts certain groups:
- First-generation college students.
- Borrowers who did not complete their degree programs.
- Graduates of for-profit institutions.
- Low-income borrowers.
- Minorities and those from disadvantaged backgrounds.
- Borrowers experiencing medical or financial hardships.
Borrower rights under the Fair Debt Collection Practices Act
Despite the intensified collection efforts, borrowers retain important rights under the Fair Debt Collection Practices Act (FDCPA):
- The right to request validation of the debt.
- Protection from harassing, abusive, or deceptive collection practices.
- The right to request that collectors cease communication.
- The ability to dispute inaccurate information.
- Time-barred restrictions on when collectors can contact borrowers.
Collection agencies for federal student loans must adhere to these regulations, though they still have significant leverage compared to collectors of private debts.
Your options
Borrowers facing the new collection system have several potential options:
- Loan rehabilitation: Complete nine voluntary, reasonable, and affordable monthly payments within a ten-month period to remove the default status.
- Loan consolidation: Consolidate defaulted loans into a Direct Consolidation Loan, potentially with an income-driven repayment plan.
- Repayment in full: Though usually not feasible, paying the defaulted amount in full immediately resolves the default.
- Fresh Start Initiative: Check eligibility for any current programs designed to help borrowers exit default.
- Bankruptcy: In rare cases with proven “undue hardship,” student loans may be dischargeable through bankruptcy proceedings.
Preparing for interactions with collectors
When dealing with collection agencies under the new system, borrowers should:
- Keep detailed records of all communications.
- Get all agreements in writing before making payments.
- Never provide bank account access for automatic withdrawals.
- Know their rights regarding communication limitations.
- Consider seeking advice from a student loan attorney or counselor.
The bottom line
The stricter referral process for defaulted student loans presents serious challenges for struggling borrowers. However, understanding the system, knowing your rights, and exploring available options can help mitigate the worst consequences.
For borrowers already in default or approaching it, taking proactive steps is essential. Contact your loan servicer immediately to discuss potential solutions before the default referral process begins. For those already dealing with collection agencies, knowing your rights under the FDCPA provides important protections against the most aggressive collection tactics.
As the student loan landscape continues to evolve, staying informed about options for managing default remains the best defense against the serious consequences of the new collection referral system.
There’s always JG Wentworth…
While we don’t work with federal student loans directly, if you’re struggling with unsecured debt and it’s interfering with your ability to pay off your loans, we might be able to help. If you owe $10,000 or more there’s a good chance you’ll qualify for the JG Wentworth Debt Relief Program.* Some of our program perks include:
- One monthly program payment
- We negotiate on your behalf
- Average debt resolution in as little as 24-60 months
- We only get paid when we settle your debt
If you think you qualify for our program, give us a call today so we can go over the best options for your specific financial needs. Why go it alone when you can have a dedicated team on your side?
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* Program length varies depending on individual situation. Programs are between 24 and 60 months in length. Clients who are able to stay with the program and get all their debt settled realize approximate savings of 43% before our 25% program fee. This is a Debt resolution program provided by JGW Debt Settlement, LLC (“JGW” of “Us”)). JGW offers this program in the following states: AL, AK, AZ, AR, CA, CO, FL, ID, IN, IA, KY, LA, MD, MA, MI, MS, MO, MT, NE, NM, NV, NY, NC, OK, PA, SD, TN, TX, UT, VA, DC, and WI. If a consumer residing in CT, GA, HI, IL, KS, ME, NH, NJ, OH, RI, SC and VT contacts Us we may connect them with a law firm that provides debt resolution services in their state. JGW is licensed/registered to provide debt resolution services in states where licensing/registration is required.
Debt resolution program results will vary by individual situation. As such, debt resolution services are not appropriate for everyone. Not all debts are eligible for enrollment. Not all individuals who enroll complete our program for various reasons, including their ability to save sufficient funds. Savings resulting from successful negotiations may result in tax consequences, please consult with a tax professional regarding these consequences. The use of the debt settlement services and the failure to make payments to creditors: (1) Will likely adversely affect your creditworthiness (credit rating/credit score) and make it harder to obtain credit; (2) May result in your being subject to collections or being sued by creditors or debt collectors; and (3) May increase the amount of money you owe due to the accrual of fees and interest by creditors or debt collectors. Failure to pay your monthly bills in a timely manner will result in increased balances and will harm your credit rating. Not all creditors will agree to reduce principal balance, and they may pursue collection, including lawsuits. JGW’s fees are calculated based on a percentage of the debt enrolled in the program. Read and understand the program agreement prior to enrollment.
This information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that you consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.