I have two student loans from 1998. One is in good standing with the CIBC and one is in collection.  The Federal loan went to collections about 5 years ago while I was unemployed.

I pay on it every month.  I've never missed a payment in the 5 years.  However, each year the collections people call me demanding payment in full.

We generally spend days going back and forth with them threatening to take legal action if not paid in full and then they agree to payments again for another while.

This time they are demanding at least a $3000 lump sum and refuse to take payments. This amount they say is the interest owing. The loan is about 13000.

Can they take legal action if I'm paying each month?

I thought if I was paying it monthly then a court really had no interest in it.  They could garnish my wages but the end result would be the same. Either way they would get the money in monthly payments.

At the time of being unemployed I was able to keep all of my bills paid and in good standing with the exception of the one student loan.  The collection agency told me I have my priorities screwed up and I should be applying all of my money to the one in collections.  This made my head spin.... Why would I let all of my other bills go to collections to get a bad bill paid faster?