How to negotiate student loan settlement

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It can take years — and sometimes decades — to pay off your student loans. With home payments, utility bills, auto loans and living expenses demanding your attention, student loan payments might not be high up on your priority list. If you’re having trouble making payments, you may want to negotiate your student loan payoff with your lender and try to settle for less than you owe.

You might want to consider a student loan settlement if:

  • Your loans are in default (or near it).
  • You have a lump-sum payment to settle your outstanding debt.
  • The alternative is bankruptcy or a court judgment.

What is a student loan settlement?

Student loan settlement is when you settle your student loans for less than what you currently owe. If your loans are in default and you have a chunk of cash saved up, your lender might be willing to settle. It’s a good option if you’re behind on your debt and can pay off a good portion of it right away.

The settlement amount varies by your lender. Some might be willing to settle for 50 percent of your loan, while others might require you to pay more — upward of 90 percent of your loan. Not all lenders do this, but some will accept a settlement if it’s the only way they expect you to pay off your outstanding debt.

When can I settle my student loans?

You may have to wait a while before you can settle your student loans. You can’t settle if your loans are in good standing and you make timely payments every month. Even if you’re a little late on your last payment, you’re usually not considered eligible until you’re in default.

When you’re late making a student loan payment, your loans are delinquent until you make that payment. If your loan continues to stay delinquent, it will eventually go into default. You can start requesting a loan settlement in delinquency, but only if it’s on its way to default. You can also request a settlement once your loan has passed into default.

Reasons for a federal student loan settlement

You might qualify for a student loan debt settlement with your federal loans if:

  • You can’t afford the loan: You’ll need to prove that you can’t afford to repay your loan, whether that’s through pay stubs and bills or recent tax returns.
  • You’ve redefaulted: If you’ve defaulted on the same loan more than once, you may not have other financing options, like rehabilitation, income-driven repayment plans, deferment or forbearance. Instead, a settlement might be one of your last options.

If you’re behind on your loan and just need a little more time to catch up, or you want to pay your loan but need a different plan, you may not need settlement and should look into other options.

Reasons for a private student loan settlement

Federal student loan borrowers aren’t the only ones eligible for a settlement. Private student loan settlement is also an option if your loans are in default.

Most federal student loans consider loans to be in default if you haven’t made a payment in more than 270 days. For private student loans, most loans will default after 120 days of nonpayment, though this depends on your lender.

If you can show your lender that you don’t have income or assets to pay back your loan, your lender might accept a settlement offer. However, you’ll still need to have an offer worth accepting, which usually includes a lump-sum offer or a final amount paid over the course of a few installments.

How to negotiate your student loan payment

Before you get started with negotiations, you’ll need to make sure that your loans are either in default or near default. Some lenders may suggest an alternative repayment plan, but if your loans are far beyond hardship assistance, you can start negotiating a student loan settlement.

1. Know your options

Private student loan settlement depends on your lender. Some lenders might require you to pay at least 70 percent or 80 percent of your loan, while others might be more lenient and accept less. The longer you go without making a payment, the less you might need to pay when you request a student loan settlement.

If you have federal loans, there are a few standard options:

  • Pay the remaining principal and interest without any collection charges.
  • Pay the principal and half of the unpaid interest that has accrued since the loan went into default.
  • Pay 90 percent of the current balance of principal and interest.

Be open if your loan servicer requests a different settlement offer, and don’t be discouraged if you end up going with a backup plan.

2. Let the lender make the initial offer

Even though you should have an idea of your options, let your lender make the first offer. This gives you the chance to review the offer and either accept it or counteroffer. It’s your starting point for negotiation. By knowing your options ahead of time, you’ll be able to successfully negotiate a plan you’re comfortable with.

If you’re unsure how to get here, explain your situation to your lender and ask “how can we go about getting this right?” or “what are my options at this point?”

3. Request a paid-in-full statement

Since this is outside of your normal payment plan, you’ll need to handle a settlement carefully. Get an offer in writing, have a lawyer review the terms and request a “paid-in-full” statement as part of your terms. Once you’ve paid your debt in full, make sure that you get this letter. Otherwise, you may still be on the hook for some of your outstanding loan balance.

Keep this statement handy in case lenders or collections try to request money from you later on. You may also need this when you file your taxes. You may receive a 1099-C from the lender after you have paid the settlement for the amount of debt that was canceled.

Alternatives to student loan settlement

In many cases, student loan settlement should be a last resort, particularly since defaulting on your loans will damage your credit score. Before settling your student loans, try getting back on track with your payments in other ways.

Deferment or forbearance

Both deferment and forbearance offer a temporary pause on your student loan payments. In both cases, interest may continue to accrue, but it could still be worth it if taking a break from payments helps you stay on track. The federal government has defined forbearance and deferment programs for federal student loans, which could last up to three years, while private student loan lenders usually offer forbearance on a case-by-case basis. Most private student loan forbearances are limited to increments of two or three months at a time.

Income-driven repayment plans

For federal student loans, you can put your loans into an income-driven repayment plan. In these plans, your payments are based on your income and how many people are in your household. If you don’t have a job, you could pay as little as $0 without facing any penalties, fees or harm to your credit. What’s more, you may be able to see your loan balance forgiven after spending 20 to 25 years on an income-driven repayment plan.

Refinancing

If you can’t afford payments as is, you might want to consider refinancing. If you have good credit or higher, refinancing could secure you a lower interest rate than what you have now, and you can pick a plan with low monthly payments.

Refinancing typically isn’t a good idea if you can’t get a lower interest rate, and it’s usually best to avoid refinancing federal student loans — doing so will cut you off from income-driven repayment plans and federal forbearance.

FAQ about student loan settlement

Will settling student loans hurt your credit score?

Settling your student loan debt will hurt your credit score. For one, lenders report loan default to the credit bureaus, and you usually must be in default in order to initiate a settlement – though you can ask the lender to remove the default from your credit history as part of the settlement agreement. Because the lender takes a loss when it settles, an account that was settled for less than the full amount also shows up as a negative mark on your credit reports.

A settled account can remain on your credit report for up to seven years, but its impact lessens over time.

How much money can you save with a student loan settlement?

How much money you can save by settling your student loans depends on how much you owe, as well as the outstanding collection charges and late fees associated with your delinquent loans. Sometimes, a settlement waives the late fees, collection costs or a portion of your interest. In some instances, you could get a small percentage of your principal balance waived as well. You might be able to save 10 percent to 50 percent of your loan balance.

How much does student loan settlement cost?

When you settle your student loans, you’ll have to pay the settled amount in a lump sum, which could be 50 percent to 90 percent of your outstanding loan balance — the exact amount depends on what your lender agrees to. You may also have to continue paying collection fees and interest in the meantime.

Along with that, a settlement will cost you years of damage on your credit report, hurting your chances of borrowing in the future, whether that’s a credit card, auto loan or mortgage.

What is the best way to get rid of student loan debt?

With any debt, the best way to get rid of it is to pay for it. But if you’re struggling to make or afford payments, talk to your lender about your options. You might qualify for deferment, forbearance or an income-driven repayment plan. You could also refinance your loans to get a lower interest rate or lower monthly payment (or both). Student loan debt settlement is one option, but that doesn’t mean it’s the best option for everyone.

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Written by
Dori Zinn
Contributing writer
Dori Zinn has been a personal finance journalist for more than a decade. Aside from her work for Bankrate, her bylines have appeared on CNET, Yahoo Finance, MSN Money, Wirecutter, Quartz, Inc. and more. She loves helping people learn about money, specializing in topics like investing, real estate, borrowing money and financial literacy.
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