How Can I Get My Student Loan Penalty Forgiven? – Scott

“Dear Steve,

I graduated back in 2002 and borrowed 22k worth of government back student loans. Unfortunately I was unemployed for 2 years shortly after. I put my loan into deferment and moved around a bit. Next thing I know my loans went out of deferment and I was unaware of this because I was moving around so much. Then I received a notice stating I was in default. I was penalized 25% of the loan amount. I spoke to the collection personnel and they put me on IBR. They also told me if I am good for two years that they will take away that penalty. I was young and naive so quickly pull out some cash advance from my credit card because i didn’t want that 6k penalty. I consolidated my loan and begin making payments. Nothing was in writing. After 3 years of making good on my payments I called Suntrust and they said that wasn’t true about the penalty forgiveness. Sunstrust was also the original bank. I’m glad I’m able to pay my student loans back. I only have like 6k left on the balance but I felt I was cheated. For one that 25% penalty was over the top and secondly someone promised me something to get me to sign and get their commission.

Is there any other recourse I can take to get that penalty forgiven?


Dear Scott,

Unfortunately the 25% collection penalty is permitted once a loan is sent to an outside collection agency.

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

You can always contact the Department of Education Ombudsman or Federal Student Aid collections if you would like to escalate this matter and fight for the reduction in the penalty you were told about.

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The collector did a great service by placing you on the IBR to help you rehabilitate the loans.

Unfortunately it looks like the loss of communication regarding the status of your loans created a situation where you defaulted and that led to the account being sent to an outside agency.

One other expensive learned that will serve you well for the rest of your life is to get any offer to alter the terms of a financial relationship in writing and then don’t lose that letter.

Please post your responses and follow-up messages to me on this in the comments section below.


You are not alone. I'm here to help. There is no need to suffer in silence. We can get through this. Tomorrow can be better than today. Don't give up.

Damon Day - Pro Debt Coach

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