It’s safe to say that none of the 3.3 million Americans with defaulted student debt ever hoped to wind up in such a precarious situation when they originally borrowed their loans.
The very real threat of debt collectors knocking at your door, wage garnishment, offset taxes — or worse, legal action — are consequences that can pose major personal and financial damage if you’ve let your loans go unpaid.
We often hear about credit card debt settlement, but can you successfully negotiate and get your student loan balance settled before the problem gets to that point?
In a word, yes. Student loan debt settlement is possible and borrowers can arrange to pay less than what they originally owed. But it does come with some considerations, and there are alternatives to think about if you find yourself in default.
Can you settle student loan debt?
If you’re current on your loans, or — as we’ll talk about below — you have enough cash reserve to pay down your debt, you aren’t eligible for settlement. It is only available if you’re in default on your student loans.
In general, the time to pursue debt settlement is after you’ve gone into default (and the collections process has begun), but before any legal moves have been made.
A loan settlement isn’t the same thing as loan forgiveness or discharge, where your loan balance is canceled under special circumstances. It’s not a refinance or amended payment plan, either.
With a settlement, your lender is essentially striking a deal to “settle” for a lower amount than what you borrowed if it means resolving your debt without the need for collections, court judgments, or other actions.
With a federal student loan settlement, borrowers have one of three standard payment options through private collections agencies, via the US Department of Education:
- You can pay all your current principal balance, plus accrued, unpaid interest, with any future collection surcharges and fees waived;
- Pay the total principal with half of your interest balance (the other 50 percent is forgiven);
- Pay 90 percent of the total principal and balance owed (10 percent discounted).
If you’re in default, any one of these three settlement alternatives may seem like a godsend. But there’s a catch. The government will expect you to pay your student loan debt settlement in one lump sum, usually 90 days from the settlement agreement date, so you’ll need to be prepared to muster up the cash for it.
Even with collection fees waived (settlement option one) or a percentage of your principal/interest deducted (options two and three), that’s still a lot of money to pay at once. You may also owe taxes on any unpaid interest forgiven as part of a debt settlement.
There are instances when the Department of Ed may allow you to pay your settlement balance in monthly installments (just like you would with regular monthly loan repayments), but they’ll need to be paid within one fiscal year, according to FinAid.org.
Where you might generate that kind of cash for a big settlement payment is up to your own circumstances, so examine your situation carefully if you’ve arrived at a settlement agreement with your lender.
Just as with negotiating interest rates, private student loans can also be settled. Unlike federal loans, APRs can vary from lender to lender, so the terms, conditions, and amounts you may be able to negotiate could differ from those through the US government.
When you can’t settle student loan debt
In some cases, student loan debt can’t be settled. If any of the following apply to you, you could be ineligible.
1. You’ve deliberately defaulted on your loans just to settle.
Also called “strategic default,” this is a form of fraud that can land you in bigger trouble. By holding off on your payments, it sends the message to your lender that you’re forcing them to settle.
If you hold off making your payments and become delinquent with the intent to go into default on purpose, you’ll lose the choice to settle and you’ll still owe your entire balance — plus, interest continues to accrue.
2. A court judgment has already been issued against you.
Once lawsuits have been filed, judgments have been made, and you’ve been ordered to pay your lender what you owe, it’s too late in the game to request debt settlement.
3. You’ve come into a disproportionately large sum of money.
According to financial aid expert Mark Kantrowitz, lenders won’t typically approve a settlement if you have enough cash to make your loan payments or pay your debt balance in full.
If, for example, you received an inheritance, won the lottery, or were granted a big raise at work, it’ll be harder to prove the financial hardship necessary to seek out a debt settlement to begin with.
How to settle student loan debt
A collection agency, whether through the US government or private lender, won’t usually settle a defaulted student loan debt if it’s less than the amount that the lender is likely to receive over the life of the original loan — so negotiation is essential during settlement talks.
Do you go it alone or hire a student loan attorney? A lawyer can help you navigate the often confusing landscape of negotiations. The fees and rates they charge may still be worth the cost if they can get you a good settlement, and could be a welcome alternative to learning how to settle student loan debt yourself.
If you decide on the DIY route, experts strongly discourage against guilt-tripping your lender into settling or complaining about your debt. It’s also not advisable to mention extra assets that a lender could try to garnish in collections, or to take the first offer that comes along.
When a settlement is reached, always make sure to get it in writing. It’s recommended to have an attorney review the contract to ensure it’s legally binding.
This will also guarantee that your lender fulfills their end of the settlement, too, which should include a final statement indicating that you’ve paid off your debt in full. Ensure that your agreement includes all of the debts you’re intending to settle and that none (federal or private) are omitted.
Impacts, consequences, and alternatives to student loan debt settlement
A student loan debt settlement can have a negative impact on your credit report and FICO score, since it indicates that you’ve gone into both delinquency and default on a loan. However, a settlement is the lesser of two evils and doesn’t affect your credit score as badly as a collection or judgment might.
In this case, it’s perfectly acceptable to request that your lender reports the settlement as a paid-in-full account instead of a settled debt, or to remove the default label from your credit report. With no more delinquency or default status on file, your credit score may actually see improvement.
Ultimately, before developing a pattern of consistent delinquencies that could lead to default, communicate with your lender(s) first about your options. See if you’re eligible for amended payment plans, refinancing, deferment, or forbearance on your student loans. Look into income-based repayment plans, which calculate the monthly amount you owe on your student loans based on your current take-home pay.
In addition to building a budget and paying down your student loan balance on time, make sure you’re aware of how much you owe, how many loans you have, the total balances for each, and what your terms and interest rates are.
Checking the National Student Loan Data System as well as consulting your credit report are two essential resources to avoid falling behind on your loans, ensuring that default and student loan debt settlement never enter the picture.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.97% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at firstname.lastname@example.org, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate|
|2.47% – 6.97%1||Undergrad & Graduate|
|2.51% – 8.09%4||Undergrad & Graduate|
|3.02% – 6.44%2||Undergrad & Graduate|
|2.47% – 6.71%5||Undergrad & Graduate|
|2.79% – 8.39%6||Undergrad & Graduate|