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Your Student Loans are in Collections: Now What?

by Jesse Campbell on
5/7/2025
in Managing Student Loans
Woman reading paperwork.

You'd be forgiven if you haven't thought about your student loans in a minute. 

First, all federal student loans went into forbearance during the Covid-19 pandemic. While that payment pause was extended, there was a lot of talk about student loan forgiveness potentially wiping away a ton of linger debt. That didn't really happen, and then student loan payments returned, but with a 12 month "on-ramp" where missed payments wouldn't be reported to credit bureaus.

And now here we are: on May 5, 2025, the Department of Education officially resumed collection activities on defaulted federal student loans.

If you haven't been paying your student loans, you may be seriously delinquent or in default. And you wouldn't be alone. According to an analysis from TransUnion, over 20% of federal student loan borrowers were 90 days or more past due as of February 2025. That means one in every five federal student loan borrowers with payments currently due is seriously delinquent.

What happens when you default on federal student loans?

We've talked about the potential ramifications of defaulting on your student loans before, but the most likely outcome is that the government will find a way to get the money you owe.

This might come in the form of a wage garnishment, where a portion of your paycheck is withheld and used to repay your debt. Alternatively (or simultaneously), funds could be withheld from your income tax refund or other federal payments (including Social Security).

It's also worth noting that, unlike private creditors and lenders, the government doesn't need a court judgment to start garnishing your wages. 

How much can they garnish?

If you can't afford to pay your student loans in the first place, the idea of having funds automatically deducted from your paycheck can be harrowing. Fortunately, there are limits on the amount they can take.

Under federal law, the U.S. Department of Education (or the debt collector working on its behalf) can garnish the lesser of:

  • 15% of your disposable income, or
  • The amount by which your weekly disposable income exceeds 30 times the federal minimum wage (which is currently $7.25).

Your disposable income is essentially whatever's left after your legally required deductions (taxes, Social Security, Medicare, and some retirement contributions) have been made.

In other words, if your weekly disposable income is low enough (~$200 or less per week), you may be able to avoid having any funds garnished.

What can you do if your federal student loans are in collections?

There are a few different ways you can resolve or rehabilitate a student loan in default. Here are the steps to take:

Verify the loan

As with any collection effort, you should always make sure that you're actually responsible for the loan in question.

  • Read the collection letters carefully. Make sure that the names, dates, and balances all make sense.
  • Request a debt validation letter on private loans to ensure that they're legitimate.
  • Visit studentaid.gov to confirm the status of your federal loans.

Apply for student loan rehabilitation

Student loan rehabilitation can help you get your federal student loans back into good standing and allow you to continue to access many of the unique benefits of federal student loans, including deferment, forbearance, and income-driven repayment plans.

To begin the rehabilitation process, you'll need to contact your loan holder. The requirements will vary depending on the loan type, but the path to rehabilitation is typically:

  • Sign an agreement committing to making nine "voluntary, reasonable, and affordable" monthly payments
  • These payments need to be made within 20 days of the due date
  • You have to make all nine payments within 10 consecutive months

If your wages are already being garnished, unfortunately, student loan rehabilitation won't stop that, at least not immediately. Per studentaid.gov, "Involuntary payments may continue to be taken until your loan is no longer in default or until you have made at least five of your rehabilitation payments."

Importantly, you can only rehabilitate a loan once. If you default on the loan again, you'll have to use another method.

Consolidate your student loans

The biggest alternative to rehabilitation is consolidation. Consolidating allows you to turn your defaulted loan (or loans) into a Direct Consolidation Loan. 

You can apply for a Direct Consolidation Loan through studentaid.gov. As part of the process, you'll need to use an income-driven repayment plan or make three consecutive, full monthly payments on the defaulted loan first, before you can complete the consolidation.

Consolidating your federal student loans can get you out of default quickly, but it's important to note that any accrued interest will be rolled into the new loan total. Future interest charges will then be based on this new, higher loan amount. All of which is to say, you may end up paying more if you go this route.

Repay the debt in full

If you have the ability to simply pay off the remaining balance, you can always do that. Most borrowers, however, aren't in that position, which means paying off your federal student loans would require taking out a new private loan.

In most cases, the terms and flexibility offered by a federal student loan are going to be better than what you can get from a private lender, so this is only a path worth pursuing if rehabilitation and consolidation are off the table.

Settle the debt

While settling defaulted credit card debt can be fairly straightforward and make a lot of sense for both parties, settling federal student loans can be difficult to pull off. In truth, while you may be able to get collection costs waived and your interest owed reduced, getting any amount of your principal waived is rare. As such, this is only an option when every other avenue has been exhausted.

There's no easy answer for student loan borrowers who are suddenly facing down default loans and the threat of garnishment. Your best bet is to be proactive. If rehabilitation or consolidation are available, start that process immediately. 

And if your student loan payments are straining your budget, consider where else you can potentially make cuts. Credit card debt should be an area of focus. Shedding other debt quickly can free up space in your budget for returning student loan payments.

If you need help reviewing your finances, we're here to help. Our experts are available 24/7, online and over the phone.

Tagged in Debt collection, Loans, Laws and legal questions

Jesse Campbell photo.

Jesse Campbell is the Content Manager at MMI, with over ten years of experience creating valuable educational materials that help families through everyday and extraordinary financial challenges.

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