As if owing an overwhelming amount of student loan debt isn’t bad enough, do you know that if you default on your loan the lender can add collection fees to the cost of the loan? In fact, it is common for any collection charges to be deducted from each payment you make before anything is applied to the interest or principal balance of the debt you owe. Sometimes the collection fees are added on top of the loan balance.
Every lender is different in how they calculate collection fees, but usually it is a percentage of the amount of interest and principal owed on the loan. The amount of the collection fee you are required to pay is based upon the average cost of collecting student loan debt, not on the actual costs of collecting your particular loan. Additionally, there is not a cap on what debt collectors can charge for collection fees on federal student loans – they must be “reasonable.” However, a collection fee is commonly up to 25% and, with capitalization of interest, it is not considered usury. If the loan is involved in litigation, this amount may increase due to attorney’s fees and other costs being included.
As of July 1, 2014, there are some limits on collection fees the government can charge if the student loan is rehabilitated or consolidated. If you rehabilitate your student loan, your collection fees will be adjusted downward to 16%. If the student loan is consolidated, the limit is 18%. If you have a private student loan, the maximum amount of collection fees that can be charged on your student loan is governed by your promissory note (unless it exceeds the amount allowed by law).
Please keep in mind that every matter is different. If you have questions about your student loan debt and you would like to schedule a no-cost consultation to discuss your options, please contact our office by completing the form on this website or calling us at (954) 516-2566.