Question: I defaulted on a student loan with Sallie Mae about a year ago. This was not because I was trying to get out of paying, but because I was involved in a protracted period of unemployed and got the near-unanimous advice of other people to make credit card payments and rent payments before any student loan payments (since, for awhile, I was using my credit card to live off, this seemed like sound advice). Two weeks after my account was turned over to the collection agency (not surprisingly, a subsidiary of Sallie Mae) I became able to pay, and was set up in a “rehabilitation plan” whereby I was to make 12 consecutive monthly payments to the agency, and upon completion of this plan, I could have my loan sold back to the lender and have all adverse credit relating to the default erased from my credit report. I verbally authorized the agency to automatically deduct $500 per month from my checking account for this purpose. Then I started getting letters saying that to participate in the program, I had to sign a form. The form stated that I was agreeing to an 18.5 percent fee of “collection costs” (reduced from the 19% that was added to the principal during the rehabilitation period).

This is over $10,000!!! This was contrary to what was told to me over the telephone, which was that the collection costs would only be applicable if I was unable to complete the rehabilitation. I find this outrageous, since it probably cost the collection agency about $20 to “collect” my loan, since they only had the account for two weeks and I responded to one of their earliest phone calls on the matter. I spoke with the “supervisor” who refused to budge on this, and who said that it was “impossible” for anybody there to have told me anything other than what is in the written agreement. Anyway, I have paid for ten consecutive months and have two months left on my rehab agreement. I have no reason to believe that I cannot finish it and continue to pay the monthly amount. I have continued to refuse to sign the form, however. In my argument with the “supervisor” I stated in no uncertain terms that I would refuse to pay for 10,000 dollars that I did not borrow. He said that then I would be in default until the balance was zero. Contrary to this, however, a week later I received another call and the person stated that if I did not agree to the terms of the collection costs, the agency is going to initiate garnishment proceedings against me. I told them “good luck,” since I’m out of work again and have no real assets, but this is a contradition of what I was earlier told, which was that I could continue making montly payments to the collection agency ad infinitum.

I do not understand how the amount of a person’s principal is in any way related to the costs of collection. My actual collection costs were basically negligible. Do I have any recourse? I understand that I took out a loan and have an obligation to pay it and I have every intention of doing so — but I do not want to pay for $10,000 that I didn’t borrow, and which is well over and above whatever miniscule actual costs that were incurred on my account.

I have attempted to contact an attorney, but I have had little luck in finding anybody who specializes in this sort of thing (probably with good reason; I’m an attorney myself and there can’t be much money in cases where there is no award sum to take a percentage of, and where hourly billing probably won’t work for somebody who can’t pay their student loan). Most of time, I get somebody experienced in bankruptcy and they give me the spiel about how this can’t be discharged in bankruptcy, which I already knew. The way I see it, I really have only two options — I can get an attorney and try to work out a settlement (which still sucks for the credit report, right?), or I can try to challenge this fee in federal court as being a “penalty” and therefore contrary to the principles of the laws governing such charges. The former option will likely result in a reduced principal but montly payments that I cannot meet, and the second one sounds like a pipe dream. Some quick internet research on other “rehabilitation plans” offered by other lenders led me to believe that it is not regular industry practice to assess such large collection costs on a loan in rehabilitation — these are usually reserved for more serious cases.

So what can I do? Am I screwed because I happend to use a shitty lender? Are these collection costs defensible? Can they actually get a judgement against me while I’m *making* monthly payments? IS THERE ANYTHING I CAN DO???

Answer: Have you tried contacting Sallie Mae directly about this? Did you try to get a forebarance so that your loans would not be in default while you were unemployed? You might also want to contact the Ombudmans office. They handle disputes between student loan companies and borrowers. They might be able to give you some advice. The number is (877) 557-2575.

Collection agencies are the human equivalent to sharks and weasels as far as I’m concerned. They will lie and harrass you and make you bleed if it gets them their money. So, don’t believe anything they tell you. I wouldn’t sign the form if I were either. As long as you are paying them something each month, they can’t do anything to you. They can threaten all they want to, but legally, they really can’t do anything.

I had a membership with a gym once that was automatically deducted from my checking account. I cancelled the membership, within the terms of the contract, and closed the account. However, I started getting harrassed by the collection agency that handled the monthly payment collection for the gym. No matter what I told them, they didn’t believe me that I had cancelled my membership within the terms of the contract. I sent them every single piece of documentation, but apparently they were too stupid to read or something because they wouldn’t leave me alone. I even made several trips to the gym and spoke to the owner who kept telling me he would take care of it. He never did. I finally got a written letter from him stating the I didn’t owe any money. The SOB is lucky I didn’t take him to court and end up owning the gym. I even had to contact the credit reporting agencies and have the bad info taken off my credit report. It was a huge nightmare for me.

If worse comes to worse, change your phone number and don’t leave a forwarding number. As long as they have your address, they can still contact you, but won’t be bugging you with calls. And, you can force them to put everything in writting for you. I also think that if you tell them to stop calling, they have to stop calling.

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