I Refuse to Pay Extra Collection Fee for Defaulted Student Loans


Dear Steve,

Art institute for one year

Community college 2 years

Grand total now 55k, was in deferment until Aug 18, in default and sent to a collection agency with a 10k fee on top of 55k.

I want to buy a home, credit score dropped 100 points and cant buy until school loans are in “good standing”.

What options do I have with paying back? I refuse to pay 10k to a collection agency, as all payments for a long time will go towards that before the principal and interest of loans.

Art inst. private loans.

The community are federal loan.



Dear April,

It is not clear if the loan with the added fee was the private or federal loan.

No defaulted federal student loan should ever wind up with a default penalty because the debtor should absolutely look at one of the Income-Driven Repayment (IDR) programs to get the payment as low as $0 per month but keeping the account current.

The difficult part is selecting the best IDR program based on your individual circumstances. There are a lot of factors to consider before selecting one of the IDR programs.

Now when it comes to private student loans there are many factors to keep in mind. The first is that a private student loan is not much different than a car loan. You have a borrower, lender, and lending agreement. That lending agreement will specify what the company can do when you are in default.

While you may strongly object to being charged an additional fee, I bet the fee is specified in the borrowing agreement you signed. Those are the kinds of things people typically don’t pay attention to when they are excited about taking out the loan.

There are many points of view you can have regarding student loans. You could be upset that for-profit schools like the Art Institute were grossly overcharging students for less than stellar educations. You might feel your school was not accredited or the money was used for things other than a qualified educational expense. In that case, your private student loans may be able to be discharged in bankruptcy if you can afford to do that.

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Private student loans may also be able to be settled for less than the full balance. While that might wind up with you paying about 50% of what you owe, or less, you will still have the default on your credit report and may owe income tax on the forgiven amount.

While there are these and other technical solutions, there is no magic wand that will wave your long-term delinquencies away so you can qualify for a mortgage right now. Anyone who tells you otherwise should be questioned strongly.


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