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Student Loan Company Added a 25 Percent Collection Penalty. – Pamela

“Dear Steve,

Originally borrowed in 1990 to attend University. Had a total debt of a little over $12,000. Moved to a new address; wasn’t receiving mail. Moved out of state and then found out I had defaulted on my student loan. Went back to school in 1998. Because of all the deferments and forebearances this same debt is at that point over $30,000. WOW! I am currently unemployed and the house my husband I bought 3 years ago is worth half of what we purchased it for. We are working on refinancing but are living day to day.

Defaulted on the same student loan recently and just today received a letter stating I now owe over $64,000. Clearly I am in deep and have many questions. But mainly I would like to know if legally, these financial institutions are allowed to add once again a 25% penalty on to a loan that has already been penalized so gravely? Is there no limit to their reaping on my misfortune? How many times can they do that? I don’t see any end in sight and can’t understand how they can just keep exponentially tacking on huge interest and punishments.


Dear Pamela,

I’m assuming this is a government backed student loan. If so, get on the Income Based Repayment (IBR) program as soon as you can.

The bad news is, they can do this.

Pursuant to the Higher Education Act and the terms of most borrowers’ promissory notes, you are liable for the costs of collecting your defaulted Federally-financed student loans.

The largest of these costs is usually the cost of contingent fees that may be incurred to collect the loan.

The Department gives you repeated warnings before it refers a debt to a collection contractor. If those warnings do not persuade you to reach repayment terms on defaulted loans, the Department refers those loans to collection contractors.

The contractors earn a commission, or contingent fee, for any payments then made on those loans. The Department charges each borrower the cost of the commission earned by the contractor, and applies payments from that borrower first to defray the contingent fee earned for that payment, and then to interest and principal owed on the debt.

As a result, the amount needed to satisfy a student loan debt collected by the Department’s contractors will be up to 25 percent more than the principal and interest repaid by the borrower.

On each billing statement, the Department projects an estimate of the total amount needed to satisfy the debt on the date of the statement, including collection costs that would be incurred by payment in full of that amount. – Source

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About Steve Rhode

Steve Rhode
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

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