Can the Collection Agency Add to My Federal Student Loan Debt Balance? – Chad


Dear Steve,

I have three loans dating back from college. One from South Carolina Student Loans; one from Federal Student Loans, and one from Sallie Mae. I have paid off the Sallie Mae student loan which totaled $3,500.

I still owe approximately $10,000 on my South Carolina Student Loan. I went into default on the Federal Student Loan which I owe approximately $27,000. The collection agency has bought the debt and added another $11,000 worth of fees onto my Federal Student Loan principal balance. The collection agency buys your debt for significantly less than what you owe so when they collect the money they are making a profit on the repayment anyway.

Is it legal for the collection agency to add an additional $11,000 onto my principal balance for collection purposes? This seems arbitrary or extremely high to just tack onto my previous balance.



Dear Chad,

If we are talking about your federal student loan, the collection company did not buy the debt but is collecting on the debt, ultimately for the benefit of the Department of Education. This is still a federal debt.

One of the biggest consequences in defaulting on a federal student loan debt is the massive amount that can be added to your balance due.

According to the Department of Education, “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. – Source

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But there are different levels of collection pricing based on the type of loan or loan program. For example, this collection contract shows a 17.5% fee can be added.

So it is possible that the unpaid interest and collection commission added does inflate your balance by this amount.

The key is to never let your federal student loans go into default. If your loan just went into default, you can save yourself money by getting into a rehabilitation plan. This is a one-time option so don’t let your loans go into default again. If you want to avoid going into default, look at one of the income driven repayment programs. Even if you qualify for a $0 monthly payment, that will count as a payment and keep you out of default.


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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