Can You Settle Student Loan Debt for Less Than You Owe?

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student loan debt settlement

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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.

Note, however, that refinancing requires strong credit to be eligible (or a creditworthy cosigner), and there are some downsides.

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 2021!
LenderVariable APREligible Degrees 
1.89% – 5.99%1Undergrad
& Graduate

Visit Splash

1.99% – 5.64%2Undergrad
& Graduate

Visit Earnest

1.99% – 6.84%3Undergrad
& Graduate

Visit CommonBond

1.91% – 5.25%4Undergrad
& Graduate

Visit Lendkey

2.25% – 6.53%5Undergrad
& Graduate

Visit SoFi

2.17% – 4.47%6Undergrad
& Graduate

Visit PenFed

Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Splash Financial.

Splash Financial Disclosures

Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.

The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.

To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of Feburary 1, 2021.

2 Important Disclosures for Earnest.

Earnest Disclosures

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: 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 2.98% APR (with Auto Pay) to 5.49% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.34% 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 October 26, 2020, 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 10/26/2020. 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, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.

© 2020 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 CommonBond.

CommonBond Disclosures

Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. 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 0.15% effective Jan 1, 2021 and may increase after consummation.

4 Important Disclosures for LendKey.

LendKey Disclosures

Refinancing via 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 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 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.

Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of  5 years and is reserved for applicants with FICO scores of at least 810.

As of 02/17/2021 student loan refinancing rates range from 1.91% APR – 5.25% Variable APR with AutoPay and 2.95% APR – 7.63% Fixed APR with AutoPay.

5 Important Disclosures for SoFi.

SoFi Disclosures

  1. Student loan Refinance: 1. Fixed rates from 2.99% APR to 6.99% APR (with AutoPay). Variable rates from 2.25% APR to 6.53% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.25% APR assumes current 1 month LIBOR rate of 0.12% plus 2.38% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. See eligibility details. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. The discount will not reduce the monthly payment; instead, the interest savings are applied to the principal loan balance, which may help pay the loan down faster. Enrolling in autopay is not required to receive a loan from SoFi. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score.Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.

6 Important Disclosures for PenFed.

PenFed Disclosures

Annual Percentage Rate (APR) is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rates range from 2.99%-5.15% APR and Variable Rates range from 2.17%-4.47% APR. Both Fixed and Variable Rates will vary based on application terms, level of degree and presence of a co-signer. These rates are subject to additional terms and conditions and rates are subject to change at any time without notice. For Variable Rate student loans, the rate will never exceed 9.00% for 5 year and 8 year loans and 10.00% for 12 and 15 years loans (the maximum allowable for this loan). Minimum variable rate will be 2.00%. These rates are subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.