It’s safe to say that none of the millions of student loan borrowers with defaulted debt ever thought they would wind up in such a precarious situation when they originally borrowed their loans. No one starts out intending to end up in student loan settlement.
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 is student loan settlement an option too?
In a word, yes. Achieving a settlement on student loans is possible, and borrowers can often arrange to pay less than what they originally owed. But it does come with some considerations, and there are alternatives that might be a better approach if you find yourself in default.
Student loan settlement: Can it be done?
If you’re current on your loans (in other words, not in default) or if you have enough cash in the bank to pay down your debt, you won’t be eligible for settlement. It is only available if you’re in default on your student loans.
In general, the prime 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.
Before going any further, though, note that a loan settlement isn’t the same thing as loan forgiveness or discharge, where your loan balance is canceled under special circumstances. With a settlement, your lender is essentially striking a deal to “settle” for a lower amount than what you originally borrowed if it means resolving your debt without the need for collections, court judgments or other actions.
If you go for a federal student loan settlement (rather than one of alternatives we’ll discuss later in this post), then the collections agency used by the Department of Education will be authorized to offer these three standard payment options:
- Option #1: Pay all your current principal balance, plus any accrued unpaid interest, with all future collection surcharges and fees waived
- Option #2: Pay the total principal with half of your interest balance (the other 50% is forgiven)
- Option #3: Pay 90% of the total principal and balance owed (10% discounted)
If you’re in default, you might be happy with any reduction of your debt at all. But note that with the above options, you’ll generally be expected to pay your student loan debt settlement in one lump sum, usually 90 days from the settlement agreement date.
In some instances, the Department of Education may allow you to pay your settlement balance in monthly installments (just like you would with regular monthly loan repayments), but they’ll typically need to be paid within one fiscal year.
Even with collection fees waived (option No. 1) or a percentage of your principal/interest deducted (options Nos. 2 and 3), 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.
Unless you’ve received a sudden windfall of cash, you’d probably need to borrow money from friends or family. Or you could raid your 401(k) savings, but this is often a bad idea.
While the above refers to federal loans, which are far more common, know that private student loans can also be settled. Here, however, options can vary from lender to lender, so the terms, conditions and amounts you may be able to negotiate could be quite different from those available for federal loans.
When you can’t settle student loan debt
In some cases, student loan debt can’t be settled. Specifically, 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 chance to settle, and you’ll still owe your entire balance as 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
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 given a big raise at work, it’ll be more difficult 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 U.S. government or private lender, might not 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. Because of this, negotiation is essential during settlement talks.
Do you go it alone or hire a student loan attorney? While you can navigate through the process on your own, a lawyer can be a great asset and can handle the negotiation. The fees and rates the attorney charges may still be worth the cost if they can get you a good settlement, and you could be able to find low-cost or pro-bono legal aid options.
When a settlement is reached, always make sure to get it in writing. Here too, 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 no loans are omitted.
Alternatives to student loan settlement
While student loan settlement can be helpful in some circumstances, it’s definitely not for everyone. If you’re in danger of falling behind on your student loan payments, consider these alternatives:
1. Sign up for an income-driven repayment plan
If you have federal loans and can’t afford your current payment, you may be eligible for an income-driven repayment (IDR) plan. Under these plans, the government extends your repayment term and caps your monthly payments at a percentage of your discretionary income. Some people qualify for a payment as low as $0.
2. Enter into deferment or forbearance
If you’re facing a financial hardship, such as unemployment or a medical emergency, you may qualify for a deferment or forbearance. With this approach, you can postpone making payments without entering default, giving you time to get back on your feet.
Federal loans and some private loans offer forbearance options. Contact your lender to see if you are eligible for any financial hardship programs.
3. Look into student loan forgiveness
If you have federal student loans, there are some situations where you may qualify for student loan forgiveness or discharge.
There are various forgiveness options for both federal and private student loans. There are also possibilities for discharge — for instance, if you became totally and permanently disabled, you could be eligible for Total and Permanent Disability Discharge, with the remaining balance of your student loans forgiven.
4. Consider student loan refinancing
If you can’t afford your payments, but you can afford a smaller monthly bill, another option is to refinance your student loans.
With refinancing, you work with a private lender to take out a loan for the amount of your current debt. The new loan can have different repayment terms, including length of repayment and minimum payment. If you opt for a longer loan term, you’ll pay more in interest, but you could significantly reduce your monthly payment. You might also qualify for a lower interest rate.
Impact and consequences of student loan 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 may be the lesser of two evils and doesn’t affect your credit score as badly as a collection or judgment might.
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.
By keeping track of your debts, you can avoid falling behind on your loans, so that default and student loan debt settlement never enter the picture.
Kat Tretina contributed to this report.
Interested in refinancing student loans?Here are the top 6 lenders of 2019!
|Lender||Variable APR||Eligible Degrees|
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1 Important Disclosures for SoFi.
2 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 3.50% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.49% APR (with Auto Pay) to 7.27% 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 April 17, 2019, 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 04/17/2019. 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 our student 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.
3 Important Disclosures for Laurel Road.
Laurel Road Disclosures
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the fixed rate will decrease by 0.25%, and will increase back up to the regular fixed 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.
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.
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
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 2.48% effective April 10, 2019.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.49% – 7.27%1||Undergrad & Graduate|
|2.49% – 7.10%3||Undergrad & Graduate|
|2.49% – 7.41%4||Undergrad & Graduate|
|2.50% – 6.65%2||Undergrad & Graduate|
|2.49% – 7.11%5||Undergrad & Graduate|
|2.98% – 9.72%6||Undergrad & Graduate|