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 Edvisors.com, 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 FinAid.org, 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.
Kantrowitz adds that lenders will approve a settlement only if the lump sum offered exceeds the amount the lender expects to get over the life of the loan. That means that if a borrower seeks a settlement because he or she suddenly comes into a large sum of money, such as an inheritance or sizable bonus, lenders will likely not agree to a settlement because assets held in checking, savings and investment accounts become fair game in a collection case. On the other hand, assets held by friends and relatives who aren’t co-signers on the loan can’t be touched.
“If you’re able to (offer a lump sum) because a relative has offered to pay off your debt, but they want you to get a settlement in order to do it, that’s perfectly fine to mention because that’s not an asset that (a lender) can go after,” says Kantrowitz.
Lenders also can’t deplete money held in qualified retirement plans, including 401(k)s and IRAs, says Elliott H. Stone, managing attorney of the California Consumer Law Center and author of “Student Loan Secrets ‘They’ Don’t Want You to Know About.”
“If you have qualified plans, do not put them into the negotiation,” Stone says, adding that if a loan servicer or collection agency is pressuring you to raid your retirement account, it’s time to seek legal help.
Do: Request a paid-in-full statement
Don’t: Make the first offer
In order to get the best settlement deal, Kantrowitz says to let the lender take the lead.
“Say that you’d like to discuss a settlement and (ask) what amount they would be willing to accept as payment in full of your debt,” he says. “Try to get them to make the first offer. Don’t you come in and say, ‘I’d like a settlement for this amount. …'”
If settlement is possible, Kantrowitz recommends having an attorney review the terms of the offer and request documentation that shows that all of your student loans have been paid and settled.
“You need a written agreement that states that the fulfillment of the agreement will cause the loan to be paid in full, sets the terms of it and make sure that you are going to get a paid-in-full statement once you make the payments according to the agreement,” he says. “I’ve seen too many times where the borrower says ‘I settled my loans,’ but they reappeared.”