Collection Agency: Definition and What It Is
A collection agency is a company that specializes in recovering unpaid debts, either on behalf of the original creditor or by purchasing the debt outright. In student lending, collection agencies typically get involved after a borrower has defaulted and the original lender has decided to outsource or sell the loan.
When an agency is hired by a lender, it earns either a flat fee or a percentage of what it recovers. When the debt is purchased outright, the agency pays less than the face value and profits from whatever it can collect above that amount.
Why it Matters
Collection agencies operate under the Fair Debt Collection Practices Act, which sets rules on how and when they can contact borrowers, what they can say, and what practices are prohibited. Knowing those rules matters if a collection agency has contacted you. They cannot call at certain hours, cannot use abusive language, and must provide a debt validation notice if you request one.
Yrefy's articles on private loan settlements and spotting student loan scams help borrowers tell the difference between a legitimate collection contact and a predatory one.
Example
A borrower defaults on a $18,000 private student loan. The lender sells the debt to a collection agency for $4,500. The agency contacts the borrower seeking the full $18,000. The borrower, not knowing the agency paid $4,500, pays the full amount. Had the borrower understood the purchase price, a negotiated settlement of $7,000 or $8,000 might have been achievable and acceptable to the agency, which would still have doubled its money.
