How To Get Your Student Loans Out of Collections (2025 Guide)

Roughly 44 million Americans owe more than $1.7 trillion in outstanding student loan debt, and many borrowers are struggling to keep up with their payments. An analysis from TransUnion found that nearly 1 in 3 federal student loan borrowers is at risk for default. Once you have defaulted student loans, your loan servicer may transfer your account to a collection agency to recover the debt or begin collecting the money through other means. 

Getting sent to collections comes with serious financial penalties, including fees, credit damage, and potential wage garnishment. Let’s look at what happens when student loans go to collections, and what your options are if you find yourself in this situation. 

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What happens when student loans go to collections?

If you stop making your student loan payments, they could end up in default, and if you continue missing payments, they’ll eventually go to collections. However, the timeline differs slightly, depending on whether you have federal or private loans. 

“A loan becomes delinquent as soon as a payment is missed,” explains Chad Cummings, a certified public accountant (CPA) and attorney at Cummings & Cummings Law. “For federal student loans, a loan enters default after 270 consecutive days without payment. For private loans, default may occur much sooner, often after three to four months, depending on the terms of the promissory note. Once in default, the entire loan becomes immediately due.”

At this point, your loan is typically referred to a collection agency, where efforts include repeated calls regarding payment, negative credit reporting, and fines. 

“Federal law permits significant fees to be added, sometimes amounting to one quarter of the balance,” adds Cummings.

The Department of Education has broad leeway to enforce collection efforts, including wage garnishment and intercepting tax refunds and Social Security payments. In comparison, private lenders must initiate a lawsuit and secure a judgment before garnishing wages or placing liens.

How can you get federal student loans out of collections?

Once your federal student loans are in collections, you have three main options to get them out:

• Loan rehabilitation: Loan rehabilitation involves making 9 voluntary, on-time payments over a consecutive 10-month period. Once you’ve made all 9 payments, you’ll regain full federal benefits and be eligible to receive student aid again. The record of the default will also be removed from your credit report, though it’ll still show any late payments reported before your loans went into default. 
• Loan consolidation: Another option is to consolidate your defaulted loans with a Direct Consolidation Loan. If you do this, you’ll agree to either repay the loan under an income-driven repayment plan or make 3 consecutive on-time payments on the defaulted loan before consolidating it. Loan consolidation is a faster option than rehabilitation, but it may result in higher interest charges, among other disadvantages. 
• Full payoff: Finally, you can avoid any negative credit reporting by paying off the entire amount within 65 days of the date listed on the notice of intent to offset, which is a letter stating that you’ll have money withheld from federal payments to repay the debt. This solution is rare, but it may be an option for some borrowers. 

What are your options for private student loans in collections?

Loan rehabilitation and consolidation don’t apply to private student loans — instead, you must negotiate directly with your creditor, which can result in a few different options: 

• Negotiate a settlement: If you have the ability to pay off your loans in one lump-sum payment, you can negotiate a settlement with your creditors. Some collection agencies are open to negotiating for less than what you owe to avoid a drawn-out collections process. 
• Set up a payment plan: You can consider setting up a payment plan with the collection agency if it allows it. Just make sure to get any agreement you reach in writing.
• Refinance (if eligible): You may also be able to refinance your loans once they’re out of default, though this option is pretty rare. Lenders see defaulted loans as a higher risk, so they may be hesitant to offer you a new loan.

Which option is best for your situation?

According to Annette Harris, an accredited financial counselor (AFC) and owner of Harris Financial Coaching, the best option depends on your loan type and financial situation. She recommends that you start by evaluating your budget to determine whether you have the ability to repay the loan or settle your debt with the collection agency.

“If the borrower has a federal student loan, seeking loan rehabilitation would be the best option for credit repair after loan default,” she says. “I always instruct my clients when seeking to settle debt with a collection agency to request a debt validation letter and to send them settlement options in writing before agreeing to any repayment terms for personal loans.”

Cummings says that for federal borrowers, loan rehabilitation is preferable since it’s the best way to restore your credit.

“Consolidation is better suited to those who need a quick resolution, such as to stop student loan garnishment,” he explains. “Rehabilitation has the advantage of removing the default from a credit report, but it takes time and can only be used once. Consolidation is faster but leaves a permanent mark.”

He adds that borrowers considering a settlement should weigh the potential tax consequences of any forgiven debt, since it may be treated as taxable income. 

What happens to your credit after resolving loans in collections?

Resolved student loan debt can have a positive impact on your credit score, but the immediate impact may vary. It also depends on whether you have federal or private loans.

“With consolidation options, the credit score reporting could help rebound a depleted score after nine consistent payments within 10 months,” says Leslie Tayne, founder of Tayne Law Group, a debt resolution law firm. “With other options, the consumer may not see their credit bounce back as quickly.”

“For borrowers with private student loans, it may take time for the consumer to see their credit score rebound,” she explains. “At times, it can take years, depending on the damage done and other reported credit trade lines.” She adds that having a structured repayment plan and budget in place is key to successfully improving your credit and finances.