How To Settle Student Loans | Is A Student Loan Settlement Possible

A student loan is a type of loan that is specially designed to help students to pay their educational costs like tuition fees, books, living expenses, supplies, etc. There are various types of student loans available that you can take to complete your course or graduation. Sometimes, it becomes very difficult for students or the guardian of the students to pay the full loan. In this type of situation, you might be able to settle the student loan for less than you owe. So, how can you settle a student loan?

Most education loans are from banks and financial institutes whose business is well-diversified beyond student loans. This type of loan is very difficult to settle. On the other hand, Federal student loans are also available but they are also difficult to settle. But you can settle FFEL or Perkins Loans of any amount, and suspend or terminate the collection of these loans. If you took a student loan from non-profit state loan agencies then you won’t be able to settle the student loan.

When You Can Settle Student Loans

If you took loans from Federal and private student lenders then the loan has to be in or near default so that you can start settlement negotiations. If there are 270-days of past-due payments then the Federal student loans enter default. However, the timeline varies for the private student loans and other non-profit state loans. For these loans, usually, the default often occurs after 90 days of missed payments. If you have a Federal student loan then discharge in bankruptcy won’t be an option to get rid of the loan. On the other hand, you might be able to get rid of your private loans because of discharge via bankruptcy. There are other options available for Federal loans to eliminate your debt. You can eliminate your federal loans on occasions such as school fraud and total and permanent disability.

Reasons For Federal Student Loan Settlement

Usually, it is very difficult to settle the Federal student loan and it is also not very common because the Department of Education and other federal student loan holders have various other ways to get money from defaulted loans. For example, the Department of Education can get the money back from wage garnishment and tax refund garnishment. However, there are some occasions when you might get the federal student loan settlement – 

Can’t Repay The Loan: If you are not able to repay the loan then you have to provide copies of your tax returns, pay stubs, or other documentation to make your case. Moreover, you have to qualify for Pay as You Earn or Income-Based Repayment for loan settlement.

Defaulted More Than Once On The Loan: This is a great way to settle your federal student loan. Usually, you can rehabilitate defaulted loans only once but if you try to re-default on the same loan then the financial institution might be want to find a settlement for your student loan.

If Loan Holder Can’t Collect The Debt: If the loan holder isn’t able to collect the debt amount from you then the loan holder might accept a debt settlement. Because this is the only way to get the money back from you.

Reasons For Private Student Loan Settlement

It is very easy to get private student loan settlements because private lenders don’t have the collection leverage of their federal counterparts. Below are some common scenarios when a private loan holder accepts a settlement – 

Little Income Or Asset: usually, the private lenders make their decision to settle the loan based on its observation of your ability to repay. You will have to show that it is impossible for you to repay the total debt amount and the private lender won’t be able to get much money from you in the future. A long-term financial hardship is a great example of this type of situation.

Strong Legal Defense: Private loan holders have the legal right to sue you if you don’t pay the debt in time. Therefore, you have to provide strong legal defense to beat the loan holder in a court judgment. If you don’t have a strong legal defense then the loan holder might be able to garnish your wages or take money directly from your bank account.

How To Settle Student Loans?

You can settle the student loan on your own or you can hire a more experienced negotiator to settle the loan for you. Below are the detailed processes of settling a student loan.

1. Contact The Company

First, contact the company that has been reaching out to you about your defaulted loan. Usually, the collection agency contacts if it is a defaulted student loan. If that is the case for you then contact them and ask them for a settlement.

2. Hire An Attorney

If you have limited knowledge about student loan settlements then you should hire a student loan lawyer or an attorney who specializes in debt settlements. You have to pay legal fees to hire an attorney. If it’s a federal student loan the Attorney will be the best option for you because he/she can negotiate federal student loan settlements or the private student loan holder has sued you.

3. Debt Settlement Company

This is a good option for you if you’re still making payments. Here, the debt settlement company will have you stop making payments and try to negotiate a settlement for a student loan. If your loans aren’t already in default then hiring a debt Settlement Company might prove to be costly because some lenders won’t negotiate with debt settlement companies. So, check your lender first before hiring a debt settlement company.

How Much Student Loan Settlement Could You Save

Usually, the private student loan debt settlement varies, and depending on the lenders, they might take less than 50% of the total owed while other lenders might not accept less than 80% of the total owed. On the other hand, savings aren’t big for Federal student loans and it is less than private student loans. Generally, the Department of Education provides specific guidelines for how much of the debt is OK to waive to its loan holders. For a Federal student loan, you might receive one of the following – 

1. 100% of collection costs waived

2. 50% of interest owed waived

3. 10% of principal and interest waived

If you have older loans originated under the Federal Family Education Loan Program then you might be waived 30% of your principal and interest. Sometimes, Federal student loan holders might accept settlement offers for less than the above amounts which are legal but very rare.

FAQs About How To Settle Student Loans

Can I Settle My Student Loan Debt For Less?

Yes, student loan settlement is possible but it totally depends on the mercy of your lender to accept less than you owe. If your loan does not default then you won’t be able to settle the student loan.

What Are The Downsides Of Student Loan Settlement?

Student loan settlement might save you some money but there are some disadvantages of this type of loan settlement. Settling a student loan can badly impact your credit score. Your credit report will show the delinquency and default for seven years which will affect your total credit score badly.

What Are The Reasons You Can’t Settle A Student Loan?

There are quite a few reasons available that would erase your eligibility for a student loan settlement. They are – 

1. If you deliberately defaulted on your loans just for settlement

2. If there is a court order that is already issued against you

3. If you have enough money to pay the loan amount

What Is An Alternative For Student Loan Settlement?

Sometimes, student loan settlement is not an option for everyone. So, some of the alternatives of student loan settlements are – 

1. Negotiating a repayment plan

2. Income-driven repayment plans

a) Pay As You Earn Repayment (PAYE)

b) Revised Pay As You Earn Repayment (REPAYE)

c) Income-Based Repayment (IBR)

d) Income-Contingent Repayment (ICR)

3. Student loan forgiveness programs

4. Refinancing

5. Bankruptcy or discharge

Do You Need A Lawyer When Negotiating Student Loan Debt?

Usually, you don’t need a lawyer when negotiating student loan debt. But if you don’t know how to negotiate a loan settlement then it is a good decision to hire a lawyer.  

References:

1. https://www.bankrate.com/loans/student-loans/debt-settlement-on-student-loan-debt/
2. https://www.forbes.com/advisor/student-loans/how-to-negotiate-student-loan-settlement/

Last Updated on February 6, 2022 by