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’ve ever fallen behind on your student loans and you aren’t sure if you’re going to catch up, student loan settlement might be a viable option to explore with your student loan servicer.

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 lump sum to pay off right away, your lender might be willing to settle.

The settlement amount varies by your lender. Some might be willing to settle for 50 percent of your loan, while others might require more — upward of 90 percent of your loan.

Student loan settlement is a great option if you are behind on your debt and can pay off a good chunk of it right away. But not every lender is willing to settle a debt for less than you owe, and not every lender will agree to your terms.

When can I settle my student loans?

Settling your student loans doesn’t happen as soon as you’d expect. 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 to settle your student loans.

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 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 and 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

Settlements aren’t only available for federal student loan borrowers. You might qualify for a private student loan settlement 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, your loans could enter default as soon as you miss a payment, depending on your lender.

If you don’t have income or assets to show your lender that you’re able to pay back your loan, it 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.

Tips for negotiating your student loan payment

You don’t have to wait for a potential student loan settlement to get a handle on your payments. If you need help, you may have a few options right now.

Don’t wait until default to negotiate

Missing a payment can already cause your credit score to take a dip and put a ding on your credit report. Before too much time passes, contact your lender and ask about income-driven repayment plans, putting your loan into deferment or forbearance, or consolidating or refinancing your student loans if better terms or interest rates are available.

The best thing you can do is be proactive and avoid putting off dealing with your student loans until it’s too late.

Discuss hardship programs with the lender

If you’ve recently lost your job, had a reduction in hours or are paying off other large bills, tell your lender as soon as you can. Many private student loan lenders offer hardship programs, like the choice to delay payments without facing a penalty, that you might qualify for.

If you have federal student loans, you might be eligible for deferment or forbearance, which temporarily halts your payments without causing your loans to go into delinquency or hurting your credit score.

Know the types of settlement offers

Settling student loan debt almost always happens because the borrower can offer a lump-sum payment. 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 student loan settlement.

If you have federal loans, you have a few different options, including:

  1. Paying the remaining principal and interest without any other fees.
  2. Paying the principal and half of the unpaid interest.
  3. Paying 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 need to resort to plan B.

Let the lender make the initial offer

While it’s a good idea to have a preference in mind, it’s a good idea to know your options and have your lender make the first offer. That way you can either accept if it’s within reason or start negotiating.

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 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.

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