What Does It Mean When The Department Of Education Recalls Your Debt?
Over the past several months, student loan borrowers have been reporting receiving a notification letter and/or email from the Department of Education stating, “The U.S. Department of Education recently recalled your defaulted student loan account.” For many borrowers, this notice was surprising because they were in default on their student loans and hadn’t made progress towards rehabilitation or repayment. As such, many have written it off as a potential student loan scam.
But these notices are, in fact, legitimate notifications from the Department of Education, and they could significantly help borrowers who take action and are in default.
Here’s what you need to know about when the Department of Education recalls your defaulted student loan debt.
Where Your Student Loans Go In Default
The process of student loan default is a long one. This means you haven’t made a full payment on your student loans in over 270 days (almost 9 months), and haven’t put your loans into deferment or forbearance.
There are a lot of negative consequences to student loan default. Specifically, the Department of Education turns your student loans over to a debt collector (there’s currently about 22 companies who collect student loan debt for the Department of Education). The government also will try to collect on your student loans by garnishing any Federal payments you receive, including your tax refund or even Social Security payments.
How The Department Of Education Has Been Auditing Results
However, since 2015, the Department of Education has been auditing the result of it’s debt collectors performance – and they haven’t been great. On average, Department of Education debt collectors have just a 3.4% recovery rate on defaulted student loans. As such, this spurred the Department of Education, in partnership with the Treasury Department, to see if they could do better themselves in-house.
Over the last three years, the Department of Education has been slowly recalling loans from third-party debt collections agencies and servicing them in-house. While the results haven’t been great (according to Congressional oversight), it does cost taxpayers less money in fees paid to third party companies, and the tactics used to collect are “more borrower friendly.”
As such, as contracts expire with existing student loan collection agencies, it appears that the Department of Education will be recalling more and more student loans to service in house.
Options If Your Student Loans Are Recalled
If you receive a letter or notification that your loans have been recalled, the first thing is to validate the accuracy of the notice. If you weren’t aware of who your loan servicer was, you should contact the Department of Education and validate. You can contact them here: https://myeddebt.ed.gov/borrower/contactusSubLinks.action
Once you’ve ensured that the letter is valid, you can follow the steps on the notice to take action. Typically, the notices say something like “Take action on your loans before XX date, and avoid paying collection fees on your loans”.
This is a great deal for borrowers, who could see 5%-10% of their balance grow due to accrued collection fees. If you simply take action and start rehabilitating your loans with this notice, you can see a big savings.
How To Handle Your Defaulted Student Loans
If you are in default on your student loans, you have three real options:
- Pay your balance in full
- Consolidate your loans
- Rehabilitate your loans
For most borrowers, #1 is off the table – if you could pay your balance in full, chances are, you already would have.
Loan consolidation is an option, but it’s typically not the best option. For most borrowers in default, student loan rehabilitation is the best bet for getting out of default. If you can take advantage of student loan rehabilitation in combination with the recall letter from the Department of Education, you can see yourself getting back on track with your student loans and save a bit of money.