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It SOUNDS like you are dealing with Federal student loans (based on the 18% threat), but it is unclear from your post. If you defaulted on Federal loans, you should have had an opportunity to rehabilitate them and bring them back to good standing after only one year instead of paying year after year to the collection agency. If that is the case, is sounds like this is just a tactic the collector is using to keep their collection account open so they can collect money on the account. You may wish to make a written demand indicating you want to rehabilitate the loan(s).

I defaulted on my law school loans a few years ago and, after dealing with the collection agency (NCO Financial), worked out a rehabilitation plan. The rehabilitation plan required that I make 12 monthly on-time payments (started in Jan., 2001). After that, the balance was recalculated, the loans re-written, and I was able to resume payment directly to the lender (not to the collection agency) and the loans were in good standing... meaning I could consolidate them (which I did a couple of years later). Unfortunately, they DID add the 18% maximum-allowable collection cost to the prinipal of the loans when they were re-written (meaning the principal balance soared to almost $90K!). But you are allowed - and the lender is required to offer - a rehabilitation plan on Federal student loans as long as you agree to make 12 months of on-time payments.

As a side issue, does anyone know how the added collection costs are supposed to be calculated? I know there's an 18% cap on them, but most lenders seem to automatically add the full 18% regardless of whether is corresponds to their actual costs of collection. Since I was pretty desperate to get these loans taken care of at the time (the re-hab started about 4 mos. before I got married and there was a threat to garnish my wages at the time) I really didn't press the issue as much as I probably should have, but I really thought it was a dastardly practice.
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