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Castle Law Office of St. Louis, P.C.
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Getting Your Student Loans Out of The Hands of Collection Agencies

Defaulting on your student loans doesn’t exactly put you in rare company. Despite our best efforts, many of us don’t immediately land that high paying dream job right out of college. And considering that most of us have to deal with immediate concerns such as rent, health insurance or car payments, paying for your student loans seems like a secondary concern.

But make no mistake about it: Student loans are almost just like any other debt, and getting behind on your payments can result in the whole loan being handed over to bill collectors.

As you probably know by know, bill collectors are merciless about getting their money back for any purchased debt. They call constantly, they call your neighbors to shame you into paying, they call you at work so your boss and co-workers know about your financial situation, and they jam your mailbox with bills.

But there is one big difference between a defaulted student loan and any other form of debt. Student loans are basically the only form of loan out there that offers you a second chance. If you have defaulted on your student loan and are being harassed by third party bill collectors, you have the right to set up a short term payment schedule, and if you complete it successfully, the loan goes out of the hands of the debt collectors and back to the bank or Department of Education.

This process is called “Rehabilitation,” and if you haven’t heard of this, you shouldn’t be surprised. Going through a successful rehabilitation of your loan takes 25% of the balance of the loan right out of the pockets of the debt collectors, and as a result they have no interest in letting you know that you have legal options.

How It Works

If you default on your student loan (that is, if you fail to make payments for a particular length of time,) the bank or Department of Education sells off the loan to professional debt collectors. While debt buyers normally make plenty of money off of a purchased debt, they make an extra 25% commission from the original lender on top of the money that they get back. But the debt buyers only make this 25% bounty if they collect the loan in its full amount.

Believe it or not, you have a way to get your debt out of the hands of the professional creditors and back into the hands of the original lender. According to the Code of Federal Regulations, (C.F.R. 682.405, otherwise known as the Loan Rehabilitation Agreement,)


“…The guaranty agency must establish a loan rehabilitation program for all borrowers with an enforceable promissory note for the purpose of rehabilitating defaulted loans…”

What this means is that the collections agency is required by law to give you the chance to re-establish your credit with these loans. According to the regulations, all you have to do is provide documentation of your income and expenses, and you and the bill collectors should come to a reasonable number for a monthly payment. Once that number is established, you only have to make nine out of ten timely payments of that number. Once you do that, the collections agency has to return the loan to the original lender. This means that your loan is now being held under much more favorable conditions, and the constant calls from the commission-hungry collections agencies will stop.

Why Haven’t You Heard About This?

You might be wondering why you have never heard of this wonderful option to get the bill collectors off of your back and your credit rating back to a respectable number. The reason is quite simple: Every time the collection agencies go through the rehabilitation process, they not only lose the value of the remainder of the loan, but they also lose that 25% bounty that would receive for successful collection. Every time someone successfully rehabilitates their loans, collection agencies stand to lose thousands of dollars. Because of this, collection agencies will NEVER mention the word “rehabilitation” through the course of their interaction with you. Go ahead and check the invoices that they send you. If they have a website, go to it and do a search. You wont find that word mentioned anywhere.

The law is on your side, but you have to know about it and request that you be allowed to use it in order for it to work.

What Should You Do?

You should call your collection agency immediately and tell them that you want to “rehabilitate” you loan as you are legally entitled to do under C.F.R. 682.405. Then you should work with the collection agency to set up a monthly figure and start making your payments. There are, however, a few things that you should be on the lookout for.

It doesn’t happen often, but some bill collectors will play dumb and pretend that there is either A: No such thing as “rehabilitation” or that B: You, for one reason or another, are “not eligible.”

Remember, you have to make nine out of ten payments on time. That should be your first priority. But as we said, some bill collectors hate the idea of losing that 25% bounty and will “mishandle” your payments, which means that they can claim that you didn’t fulfill the nine out of ten payments aspect of the plan. See if it is possible to set up a direct debit system so your money gets there on time every time. If that isn’t possible, send the check through registered mail or Federal Express so you will have an accounting of exactly when they received every single payment.

If your bill collector refuses to offer you rehabilitation or claims that you missed a payment when you know that they didn’t, you should contact an experienced bankruptcy or debt collection abuse attorney as soon as possible.


James R. Brown
President and Principal Attorney at Castle Law Office
MATA Helping to Balance The Scales Of Justice Bankruptcy Attoney of the Year National Association of Consumer Advocates