student loans

Negotiating a settlement on student loans

Student Loans » Negotiating A Settlement On Student Loans

If you're in over your head with student loans, you're not alone. More than 1 in 7 federal loan borrowers default within three years of starting repayment, reports the Department of Education. Those figures don't account for private loan borrowers or borrowers who are drowning despite making payments.

If you have massive student loans that are impossible to pay back, a settlement may be attainable, but it's rare. Knowing what to say to a lender can help you close the deal.

Do: Discuss hardship programs
Don't: Rant about your debt

A settlement usually will be an option only for borrowers who have already exhausted payment reduction and postponement programs their lender offers. For the federal government, that includes graduated, extended and income-driven repayment plans, as well as deferment and forbearance options, which are also offered through nearly every major private lender.

When examining your lender's hardship options, explain why you're experiencing financial difficulty and any ideas you have on how to get out of it, says Kenneth O'Connor, a former financial aid counselor and current director of student advocacy for LendKey, a technology platform that helps students connect with credit unions that offer private student loans.

"Outline your scenario and be prepared to demonstrate what your current budget is and what your plan of action is going to be," he says. "Lenders want to see you pay your loan back."

Mark Kantrowitz, senior vice president and publisher of, a group of college admissions and financial aid websites, adds that borrowers need to have a clear summary of their finances, including all income, liquid assets and other debts. Kantrowitz advises borrowers in trouble to keep the conversation focused on what can be done to lower the debt and not on the animosity they feel toward the debt or their education.

"The lender is going to be more focused on your ability to pay as opposed to your willingness to pay, so saying things like, 'I don't feel I should owe this debt because the quality of the education was horrible,' that's not going to evoke any sympathy," he says.

Do: Disclose assets accessible only through settlement
Don't: Mention retirement investments

Settlement is usually possible only in cases where the borrower can offer a lump sum. According to, collection agencies are authorized to accept three settlement offers without getting approval from the Department of Education -- the amount of the remaining loan principal plus accrued interest (but not collection charges), the principal plus half of unpaid interest or 90 percent of the current loan and interest balance. Settlements that don't fit into one of these three categories are rarer, but possible, says Kantrowitz, though they may take longer to obtain since they will need to be reviewed by the Department of Education.


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