Does rehabbing a student loan require a fee?

Beware of collection agencies asking for fees to start a repayment plan

Opening Credits columnist Eric Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for

Ask a question.

Question for the expert Dear Opening Credits,
I read your piece about "reasonable" payments for rehabbing a defaulted student loan. I was wondering if the collection agency has the right to charge an upfront fee such as 5 percent to 15 percent in order to secure the rehabilitation agreement. In my case, they want either $784 or $2,354 upfront in order to make a payment plan. They know I do not have any money at the moment and therefore I am stuck. Any help is appreciated. Thank you.   -- Dan 

Answer for the expert Dear Dan,
It's clear from your letter that the defaulted student loan you are trying to rehabilitate is federally guaranteed. If it's were private, the "reasonable and affordable" repayment plan wouldn't even be an option.

There are two types of federal student loans, and I don't know which you have. For you to get further assistance, you'll need to find out which it is. Federal Family Education Loans (FFELs) are issued by private lenders but guaranteed by private nonprofit agencies that work on behalf of the U.S. Department of Education, and the U.S. Department of Education issues Direct Loans. If you have a FFEL, contact the loan's original guarantee agency, and if you have a Direct Loan, contact the Education Department's ombudsman.

Before you make a bunch of phone calls, it's a good idea to know how you are protected by law against overeager collectors. The Fair Debt Collection Practices Act outlines how a collection agency must behave when trying to get you to pay.

You do have a right to make good on your bad loans by using the reasonable and affordable repayment plan payment process, but you are also dealing with a collection agency. Some of these companies are unfamiliar with the plan, and a few even choose to deliberately mislead the debtor about what they are entitled to. This is why it's so important to know the facts when it comes to putting a federal student loan back on track.

Defaulted student loans can be a bear to deal with, so it's vital to go by the book. Unfortunately, the book isn't always so easy to read or understand -- for laypeople, it's full of all sorts of gobbledygook. To gain clarity, I spoke with the professionals over at American Student Assistance (ASA) a nonprofit organization dedicated to helping people with student loan problems regarding your situation. Here's what they assured me:

First, the collection agency cannot charge a lump sum fee of any amount for you to begin the rehabilitation program. That would violate federal regulations. What they can do, however, is ask you to pay the loan off or come up with a down payment to lower the outstanding balance and reduce the monthly payment amount. You don't have to comply, but they can ask.

The definition of rehabilitation is as follows. Note there is no mention or room in the language allowing them to demand a fee. A loan is considered to be rehabilitated after:

  • The borrower has made (and the collector has received) nine of the 10 payments required under a monthly repayment agreement.
    Each of the payments must be made voluntarily, in the full amount required, and received within 20 days of the due date for the payment.
  • All nine payments are received within a 10-month period that begins with the month in which the first required due date falls and ends with the ninth consecutive calendar month following that month.
  • The loan has been sold to an eligible lender.

Once you've rehabilitated the loan, you are no longer in default. Then, you'll be back on the standard 10-year payment plan. And rather than being stuck, you'll be free. Well, free to pay your loans as you should: on time and in full.

See related: Can I go back to college if student loans are in default?, Student loans in default: What are your options?

Meet's reader Q&A experts

Does a personal finance problem have you worried? Monday through Saturday,'s Q&A experts answer questions from readers. Ask a question, or click on any expert to see their previous answers.

Join the discussion
We encourage an active and insightful conversation among our users. Please help us keep our community civil and respectful. For your safety, do not disclose confidential or personal information such as bank account numbers or social security numbers. Anything you post may be disclosed, published, transmitted or reused.

If you are commenting using a Facebook account, your profile information may be displayed with your comment depending on your privacy settings. By leaving the 'Post to Facebook' box selected, your comment will be published to your Facebook profile in addition to the space below.

The editorial content on is not sponsored by any bank or credit card issuer. The journalists in the editorial department are separate from the company's business operations. The comments posted below are not provided, reviewed or approved by any company mentioned in our editorial content. Additionally, any companies mentioned in the content do not assume responsibility to ensure that all posts and/or questions are answered.

Weekly newsletter
Get the latest news, advice, articles and tips delivered to your inbox. It's FREE.

Updated: 12-19-2018