If your lender agrees to accept less than what you owe, you could settle your student loans. Settlement negotiations will not succeed unless:
You're close to defaulting on your loans.
A settlement would be more profitable for the loan holder than pursuing the debt.
Whether you can pay the settlement amount in full or over several installments depends on whether you have or can save enough cash.
Do not try to get a debt settlement by skipping student loan payments. You will severely damage your credit, collection costs can be added to the amount you owe, and the savings may not be as great as you hoped. Additionally, your lender may not be willing to negotiate with you.
Student loan repayment when it's possible
To start settlement negotiations, you must have defaulted or be about to default on your federal student loans. If a federal student loan is not paid after 270 days, the loan goes into default. Private student loan defaults are often associated with missed payments after 90 days, according to the Consumer Financial Protection Bureau.
Bankruptcies rarely discharge federal student loans, but you might be able to discharge private student loans if you file for bankruptcy.
Other options are available to you when it comes to federal student loans. A federal student loan that has defaulted may be discharged in cases such as school fraud and total and permanent disability, but they cannot be forgiven. Instead of paying off your loans, get them back into good standing and you'll likely save more money.
Private student loan settlements: reasons for repayment
The higher chance of defaulting Private student loan settlement is due to the fact that private lenders don't have the same collection leverage as their federal counterparts. Defaulted private student loans are likely to be settled if the following factors are met:
There are few assets or income for you
Generally, the lender will determine whether you are able to repay the loan based on how it perceives your ability to do so. If you're suffering from long-term financial hardship, you'll need to explain why you will not have the ability to get money from you in the future.
Your legal defense is strong
Those who hold private loans can sue you for repayment. A payday loan company may be able to garnish your wages or directly take money from your bank account in certain states if it wins a court judgment.
Alternatively, if you can prove in court that your student loans are beyond the statute of limitations or that the debt is otherwise unenforceable, you could negotiate a settlement - or have it dismissed.
You could save a lot of money if you settle your student loans
Settlement amounts for private student loans vary widely. A few lenders will not accept less than 80% of the total owed, while others will accept less than 50%.
Savings on federal student loans aren't as great as on private loans. There are specific guidelines provided by the Department of Education to its loan holders regarding how much debt can be waived. Among them are:
The collection costs are waived 100%.
The interest owed will be waived to 50%.
The principal and interest on 10% of the loan is waived.
Your guarantor - the organization that takes over these loans in default - is also able to waive 30% of your principal and interest if you have older loans originated under the Federal Family Education Loan Program.
Students who have federal student loans can accept settlement offers below these amounts, but it is rare. Additional approval is required for alternate settlement offers, either from within the organization or from the Department of Education, as they further impact the profitability of the loan.
There may be income taxes due on the amount you don't pay if you settle federal or private student loans. Speak to a tax professional to learn more.
How to obtain a student loan settlement
Students can negotiate their loan repayment on their own or with the help of an experienced negotiator.
Reach out to yourself. If you have been in touch with the company regarding your defaulted loan, get in touch with them. If a student loan defaults, the debt will likely be collected by a debt collection agency. Request a settlement offer from them.
An attorney can help you. Find a debt settlement lawyer who specializes in student loans. A lawyer will charge fees, and the savings you will get on your own may be better than those you get by hiring a lawyer. If your private loan holder has sued you, attorneys may be most helpful in negotiating settlements.
Engage the services of a debt settlement company. Companies that settle debts usually require you to stop making payments and open an account with them instead. A settlement will be negotiated once you set aside enough money. You should avoid using debt settlement companies if you are not in default on your loans. Some debt settlement companies do not negotiate with lenders and some do not help settle student loans. If you're considering this option, make sure your lender will help.
Make sure you get your loan holder's settlement offer in writing if you agree to a settlement. As soon as you pay the required amount, you should receive a receipt showing full payment. If there is a question about your debt in the future, you'll want to hold onto that.