Private Student Loans vs. Federal Student Loans

Student loans now exceed 1 trillion dollars.  To put this incomprehensible number in perspective — that is more debt than all of the nation’s credit card debt.  When there is a default on student loans, collection activities begin.

• Do student loan collectors have unlimited powers?
• Can they really take your tax refunds?
• Garnish your wages whenever they want?
• Is there really no statute of limitations on any type of student loan debt?

To get a handle on this situation, let’s look first at the similarities in collection powers and then the differences between private and federal student loans.

Similarities In Collection Of Federal And Private Student Loans

Under both types of loans, the proper party can sue you if you default on the loan.  This makes sense, as being sued is normally always an option if we default on loans.  You can face collection activities including:

• Negative credit reporting.
• Collection calls.
• Collection letters.
• You may also face abusive, illegal collection activities.

Under both types of loans, it is very difficult (but not impossible as collectors will often lie and say) to file for and receive a bankruptcy discharge.  You have to show “undue hardship” which basically means you cannot work anymore and have no hope to paying off the loan. Another similarity is both federal and private student loan collectors must follow the Fair Debt Collection Practices Act (FDCPA).  They also must both follow the Telephone Consumer Protection Act (TCPA) that restricts certain types of auto dialed calls to your cell phone.

Differences In Federal And Private Student Loan Collection

Statute of limitations – none for federal loans. Private loans will be based upon the applicable state law and what the contract says.  This can be for a short period of time or it may be a long period of time but at least it is not unlimited like the federal student loans.

Options to rehabilitate or consolidate to bring out of default – on a federal loan you can rehabilitate or consolidate (i.e. refinance) one time each if you meet the requirements. A private student loan collector does not have to allow you to do either unless the contract requires it (I’ve never seen that).

The definition of default – a federal loan is in default if you go 270 days without making a payment. A private loan is in default whenever the contract says it is. This usually is one missed payment. Or moving without providing a new address. Or filing for bankruptcy.  Sometimes it can be when you default on another debt.  You really have to read the contract closely to find out.  Given that there is a statute of limitations, you might find the default happened long enough ago that no suit can be filed against you, no threats of a suit, etc.

Ability to wage garnish – under a federal loan, you do not have to be sued in order for your wages to be garnished. But you do have to receive a notice letter and have an opportunity to request an administrative hearing. (Note many collectors will lie about this — they say they can garnish you whenever they want). A private student loan collector cannot do this — instead you must be sued, lose the suit, and then you can be garnished if allowed under state law. This is the same as a credit card debt, mortgage loan, etc.

Ability to intercept government benefits or tax refunds – a federal student loan default can result in your government benefits being intercepted. There are some exceptions but this is a very powerful tool. A collection agency for a private student loan company cannot do this. Instead it is simply the same as a credit card debt, car loan, etc.

Powerful Collection Tactics But Still Governed By The FDCPA

For any collector, whether collecting federal or private student loans, must abide by the FDCPA and cannot violate that law.  If they do, you can sue them.  In fact, if you don’t sue them, this will encourage them to continue violating the law against you and other consumers.  So appreciate the powers they have — especially if collecting a federal student loan — but understand these collectors are not all-powerful and can be brought down when they violate the law.

Some collectors are so used to being arrogant, being heavy handed, and breaking the law in such an outrageous manner that they believe they are untouchable. Suing them, as is your right under the law if they have violated the law, is a way to remind them that while they may be arrogant, they are just like you when they are in a courtroom in front of a jury — someone who is subject to the laws and they will have to accept whatever the judge and jury decide.  If you have been abused by student loan collectors or have any questions, get with a consumer lawyer in your state. If you live in Minnesota, feel free to call us at (612) 379-8800 or you send us an email on the form below.

Thanks to our great friends John Watts and Stan Herring, Attorneys at Law – Birmingham, Alabama, for much of this page content.

Consolidation of Federally Guaranteed Student Loans (studentaid.ed.gov) Department of Education’s federal website chock full of great information about repaying your student loan debt.

Consolidation of Private Student Loans (FinAid.org) Private industry website with good information about the realistic challenges of consolidating private student loans.  Contains advertisements for specific lenders, so beware. Because private student loans are marketed by thousands of lenders in thousands of ways, there is no one size fits all approach to these loans.  Even so, this website has generally good, accurate information about the private student loan process.

Student Loan Borrower Assistance: This is an excellent resource with comprehensive information on what borrowers with student loans can do to deal with both federal and private student loans.

U.S. Consumer Financial Protection Bureau: This tool provides information and advice for optimizing how you pay off your student loans based on some basic information about your situation.

Click here to go the the National Consumer Law Center’s excellent resource on student loans!

If you’re a Minnesota resident, we can help.  Just like everywhere else in the country, Minnesota consumers are saddled with a high level of student loan debt. And just like everywhere else, Minnesota consumers are facing highly abusive debt collection practices from the twenty or so federal student loan collection agencies.  Here are some of the more common student loan collection agencies’ violations of the Fair Debt Collection Practices Act (FDCPA):

• Threats to garnish wages without following the proper procedure to do so;
• Threats to take federal benefits, including tax refunds and social security benefits, without following the proper procedures;
• Lies about what is necessary to “rehabilitate” a federal student loan;
• Lies about the option to consolidate a federal student loan in order to remove it from a default status;
• Lies about what will happen with credit reporting when a loan is rehabilitated;
• Lies about bankruptcy discharge not being available for student loans;
• Lies about the options of cancelling student loans due to disability, school closings, etc.; and
• Illegal contacts with neighbors, employers, and family members.

The FDCPA protects against violations by collectors, even collectors who are collecting student loans.  The FDCPA strictly prohibits collection agencies from lying to consumers.  Period.  There is no reason, good or bad, for a collector to lie to a consumer.  If a collector is going to attempt to explain the law to consumers, they had better get it right.

The FDCPA prohibits the collectors, even of student loans, from threatening action which the collector cannot take or will not take.  For example, a collector cannot just snap his fingers and garnish your wages.  A process must take place including a letter sent to you, an opportunity for a hearing, etc.  So for a collector to lie (which is illegal) and threaten an immediate garnishment without following the steps, is also illegal as a threat that the collection agency cannot take.

Remember that some student loan collectors feel that they are above the law.  They feel they can do anything.  With no repercussions because they do have extra-ordinary collection powers.  But they still must follow the law. When they refuse to follow the law, it is appropriate for a consumer to sue the collection agencies to hold them responsible for money damages.  This is the only way these collection agencies will learn to follow the law — when it becomes more expensive for them to break the laws than it is to follow the laws.

If you live in Minnesota and are dealing with student loan collection agencies, let us know and we will be glad to discuss your situation with you.