Can you settle your student debt for less? Maybe.
The idea of settling your debt may seem pretty alluring. Just think of the payments you wouldn’t have to make, the interest that would no longer accrue, and the stress you’ll save yourself if you
could just be rid of your student loan debt. However, settling your student loans can only be achieved in rare cases.
First of all, the only time you can settle your student debt is if you are in default. In some cases, you can settle while you are severely delinquent but not yet in default, but that is much less common (even settling any debt is pretty uncommon to begin with).
But no debt collector – be it the United States government or a private company – will allow you to settle your loan for less if you have at least a reasonable chance of paying it back. You need to demonstrate that you are unable to pay by defaulting, and that usually means you are sent into collections.
Once you are in collections, you can contact the collections agency or the owner of your loan and ask if you can negotiate a settlement. If you have federal loans, you can contact the Department of Education, but they might refer you back to the collections agency or the agency guaranteeing your loan.
In extremely rare cases, the owner of your loan or the collections agency might initiate a settlement offer. There’s a good chance any settlement will have to be paid in a lump sum.
If you're not quite sure where to start or what to do, consider hiring a CFA to help you with your student loans. We recommend The Student Loan Planner to help you put together a solid financial plan for your student loan debt. Check out The Student Loan Planner here.
Is Settling Even A Possibility
If your loans are in default, it probably means you don’t have a big lump sum lying around to give over as a settlement, even if it was less, right? That’s likely true for most people. But some people might be in default and have other finances pending, like an inheritance or a gift or a loan from a family member. For those who don’t, a settlement still might be their best bet to resolve their loan issue — a few settlements may include the option to repay in installments - which could be less that your monthly payments over time.
This decision to settle your loans is unique to each person’s financial situation. You have to break out the calculator to make sure you are getting the best bang for your buck with a settlement — taking in mind how much you are paying in collection fees, interest, and the principal. Hiring a private debt settlement negotiator or a lawyer might help you negotiate better, but you will be shouldering the cost of their services as well, and their fees might be steep.
It’s important to note your options for debt settlements for federal student loans and private student loans are different.
Settling Federal Student Loans
While you can technically settle your federal loans — whether they are FFEL or Direct Loans that are in default — it’s highly unlikely that you will be able to. Why? There are just too many ways the US government can collect from you once you’re in default.
They can garnish your wages, take your tax refunds, garnish your Social Security, or go after other federal benefits. They don’t need court approval to begin wage garnishment, either, like private loan owners do.
In fact, the Department of Education issues no public guidelines on settling federal loans because they do not want to encourage anyone to do so.
However, the Education Department does issue internal guidelines to their contracted collection agencies and guaranty agencies. (Guaranty agencies are organizations that guarantee FFELP loans against default and often service them as well, like AES.)
This Department of Education guideline memo to guaranty agencies from 1993 states that guaranty agencies are permitted to “compromise” or settle the loan under certain conditions and up to certain amounts.
The guaranty agency can waive the collection costs or even “compromise an amount up to 30% of all principal and interest owing.” Remember, that is what they are allowed to go up to, not necessarily what they will settle for. Even at the maximum compromise, a borrower would still pay 70% of their debt.
It’s also hard to tell whether these guidelines are still existent or have changed since they were issued more than two decades ago. Again, because there’s no official statement on student loan settlement, it’s difficult to gauge.
But say you do decide to go this route, you have to be ready with a good offer to negotiate with the collection or guaranty agency. FinAid.org suggests calculating to make sure your offer is at or more than what they would get if they kept garnishing. Having a couple of counter-offers ready to go is also a wise decision.
Settling Private Student Loans
Debt settlement is more common with private student debt, though not quite as common as settling other kinds of debt. Collections on private loans cannot tap into your tax returns, Social Security benefits, or other kinds of federal benefits. (If any collection agency of private loans tells you this, they’re lying to scare you.) They also must go to court in order to garnish your wages.
However, settlement of student loans is less common than other kinds of debt because it is not dischargeable in bankruptcy (except in extremely rare cases). Once again, this is because a student loan's collateral is your earnings, and you'll have to prove that you'd never be able to earn enough to pay back the student loans ever - which is a very high bar.
However, there are statutes of limitations on private loan collection. The rules vary state-by-state, but in general after a certain amount of years (usually between 3 and 10 years), your collector can no longer begin litigation against you. While they can still attempt to collect from you in other ways, they can't take you to court. This means they can't begin garnishing your wages or place liens on your property. After the statute of limitations runs out, your debt is less likely to be collected and your chances of a favorable settlement are usually higher. However, this is not an easy path to settlement. Litigation could pop up at any time before the statute expires or you could unwittingly re-start the clock on the statute depending on state law. There are also no guarantees on your settlement outcome.
Each private lender has its own policies on settlements. You could potentially settle for less than half the amount you owe. Before contacting the collections agency or lender to negotiate a settlement, you might want to consult with a student loan lawyer so you don’t make things more difficult for yourself with an unknowing mistake.
Know that settling for less is still very low on the list of desired outcomes for a collector or owner of a debt. Again, if you do get a settlement, you are often required to pay the settled amount in a lump sum.
Strategic Default To Get A Settlement
Some people consider defaulting strategically for the purpose of settling their loan. While this may be a strategy towards success if everything goes right, you could easily wreck your credit, open yourself up for litigation from your lender, and not even get want you want out of your settlement deal.
You could accrue fees and interest along the way. And you may still be stuck with the loan in the end. This is definitely more of an option for private loans, but certainly not one we recommend.
In fact, we've read some horror stories in our student loan forum from people who've attempted this as a recommendation and ended up in a much worse financial situation.
Evaluating All Your Options
However, we suggest considering other paths to manage your student loans. If you have federal loans, the good news is that they have better protections and options for borrowers to prevent default, like income-driven repayment plans and forgiveness programs.
If you do default, which is a reality for about 11% of student loan borrowers, the federal government offers default rehabilitation and consolidation to resolve the issue without pursuing settlement.
Private loans are a bit trickier because they don’t come with the protections federal loans do. But if you’re not yet in default, we strongly urge you to contact your lender and find out what your options are before you decide on settlement. We also recommend looking into refinancing if your current loan terms are not going to work for you.
If you're not quite sure where to start or what to do, consider hiring a CFA to help you with your student loans. We recommend The Student Loan Planner to help you put together a solid financial plan for your student loan debt. Check out The Student Loan Planner here.
All in all, a settlement is a rare solution for the rare borrower. We recommend pursuing it only after careful consideration.
Would you ever consider a student loan debt settlement? Why or why not?
Mark Sundberg says
Hello, I have a question regarding student loan settlement. Is it possible to negotiate a lump sum payment? My situation is this, Went into a CH-13 bankruptcy for 4.5 years. Our attorney advised us that ALL of the student loan amount we owed would be paid off after bankruptcy ended. We actually ended in 4.5 years, with everything paid off, however the whole time we paid through the plan, interest was accruing which we were not aware of. So we got the surprise after the bankruptcy ended of $12,000 still owed. Navient, who services the loan stated that this was all interest which we never saw coming thanks to very bad advice from our attorney. If we knew the interest would accrue, we would have been paying outside the plan. Even prior to discharge of our CH-13, (2) letters were sent out to the creditors asking if they had any objection, Navient/Dept of Ed never responded to either letter, further giving us the confidence that this was finally over with. I have tried to negotiate a settlement with Navient, however, was told Dept of Ed doesn’t allow for ANY settlement. I just want to confirm if this is true or not. I am willing to lump sum a payment. The loan is currently in deferment. Any advice on the matter is appreciated.
Robert Farrington says
Is this a Federal loan that you held outside of the bankruptcy? Did you have private loans and Federal loans and your private loans were discharged?
There is a lot of complicated moving parts here, and your lawyer should have advised on this.
Specifically relating to Federal loans, without knowing your situation, Navient is a servicer for the Department of Education. They give Navient the power to negotiate a little bit on collection costs and accrued interest, but that’s it. You have to remember that your debt is actually owed to the American people/taxpayer, so that’s why there’s little ability to settle.
paul jay says
1.2 trillion outstanding probably half or more non performing in 10 years the number will be north of 2 trillion when this bubble finally bursts do you want to be around?
Robert Farrington says
It’s $1.5 trillion in outstanding debt now. The delinquency and default rate has always (even through the last recession) hovered around 10%. Not a great number, but consistent.
Is there a bubble? Absolutely. But will it pop like past crises? Nope.
The reason is simple – it can’t pop. When you don’t pay a mortgage or car loan, the bank can repossess and sell the asset – even for less money. So the unwinding can happen relatively fast (still years, but fast). You take the losses, you eat the write-off, and move on.
Instead with student loans, you need to think of it like an anchor. What will happen instead is the debt burden will drag. Student loans can’t be discharged. There’s no quick fix. Instead, what happens is the banks and government garnish wages, tax tax refunds, and sue borrowers to get a lien on their home. The net effect is longer, and slower.
So, what will happen is a major GDP slowdown as borrowers struggle with the drag of the anchor around their finances. It’s actually probably a lot worse than a quick pop, but at the same time, there are more opportunities to prevent it as well.
David says
I’ve been out of school for well over 20 years and haven’t paid more than 5% on the interest of my loans. I’ve managed year after year to delay them… place them in forbearance for one reason or another. Eventually, I will die. And then those they’ll get written off. I don’t know how many people are doing that, but it isn’t very difficult. It just takes a little creativity *to stay legal* and some healthy persistence.
Brandon S says
I recently decided to get out of default through the process of rehabilitation. I have a number of federal un-subsidized and subsidized loans that were in default. My mother recently agreed to help me with a one time settlement. At the time FMS was handling my account, and the best settlement offer was; canceling all collection fees, paying 50% interest, and the full principle amount. This seemed acceptable, but I wanted my credit repaired so I opted to rehabilitate with a verbal agreement that the same offer was available after rehabilitating. I have since rehabilitated my debt, however, I have a new servicer and after speaking with them this afternoon, I was told, that collection fees are nullified but the principle and interest have been added together for a new principle balance, of which the total amount would be due to settle.
If this all makes sense, do I have any recourse in the matter to lower my settlement amount?
Thank you for your time, knowledge, wisdom, and consideration.
Robert Farrington says
When you rehabilitate, your collection fees are waived, but the principal and interest on the loan are capitalized into your new loan.
You’re not settling, you’re rehabilitating your loans. They were incorrect if they don’t you that.
Vicky says
My student loan was in default for 10 years. My credit score still excellent. Is that mean it clear? Or can still negotiating since I has not received letter from collector anymore. Thanks for your help.
Robert Farrington says
Depends on the loan debt, your state, and more. There isn’t a specific yes or no answer here. If you want to know your options, you should consult an attorney that specializes in debt.
Michael says
If you are on a income driven payment plan of Zero dollars a month, will you owe interest on the debt that has been forgiven after the ten year forgiveness?
Robert Farrington says
It looks like you are mixing up two programs.
If you’re on an income-driven repayment plan, your loan will be forgiven after 20-25 years. Any balance forgiven is currently taxable.
The 10 year program is Public Service Loan Forgiveness. That’s tax free loan forgiveness (for any balance, principal and interest).
Read up on taxes and student loan forgiveness here.
Kam says
It is possible to be in a Income driven repayment plan and also have your loan forgiven after 10 years of payments and working in a qualified public service field. Even if your payments are 0$ they are still considered payments. I was told everything would be forgiven but you will pay taxes on the forgiven amount.
Robert Farrington says
The 10 year program you mention is Public Service Loan Forgiveness (PSLF). If you meet the requirements, your loans are forgiven tax free.
Lily says
I owe my current school $5000 which I must repay before I can register for the last two classes I need to graduate. I attend a for-profit school which is actually currently being sued by the state of NY for it’s aggressive and deceptive recruitment tactics (should the state win, the school will be ordered to forgive students with defaulted accounts). Would I have a chance of settling this debt?
Robert Farrington says
If you currently go there, you can always ask them. The chances are slim, but you never know. And even if the state wins the lawsuit, you don’t know what the end settlement would be. You might get nothing out of it – as is what usually happens.
Trina says
If I am not in default on my loans but have had them for 25 years and also consolidated mine and my husbands while married. So lots of years of paying and forbearance. What are the chances of a settlement for a lump sum?
Robert Farrington says
Pretty much zero. Federal loans are debts owed to the US Taxpayer, and as such, there are specific guidelines of what can be done to settle your loans. And these won’t apply if you’re not in default.
1. Waiver of debt collection fees
2. 50% waiver of interest and fees
3. 90% of principal and interest
As you can see, you’re not really getting out of your debt with these options.
The reason there is no incentive for them to settle is because they pretty much have unlimited power to collect. If you ever do default, they can garnish your tax refund, wages, even Social Security payments.
shelly drury says
I have roughly 8 loans and the loan amount is $2500 to $6000 I am paying monthly on each loan, but just interest. will Navient negotiate each loan? For instance I owe $2500 on one loan, if I offer $2000 to settle that one loan would they consider? if so I would consider doing this with all my loans to get them paid off faster.
Robert Farrington says
Read the rules the government gives Navient above – they have to play by these rules. Remember, your Federal debt is actually owed to all US Taxpayers, and Navient is just the loan servicer handling these on behalf of the Department of Education.
The rules they have are basically:
1. Waiver of outstanding debt collection fees
2. 50% waiver of accrued interest and fees
3. 90% of principal and interest combined
They are not allowed to do what you’re asking for.
Constance Russell says
Constance say
I am planning to pay off my student loan at the end of this year, who do I need to contact or what do I need to do to lower the total payment.
Robert Farrington says
We have a guide on that: How To Make Your Final Student Loan Payment To Pay Off Your Debt.
Kimberly says
I owe $7600 in student loans but they are in collections. If I give them the $6400 payoff that they proposed, where do I stand? Is there hidden money I will still owe? Will this help my credit?
Robert Farrington says
If you pay off the amount proposed, you’re done (with at least this loan, you may have others… only you know what you owe). This may help your credit.
A good thing to try for is “pay for delete” – as part of the settlement, as them to delete the record from your credit report. That will massively improve your credit.
Kimberly says
As I am reading current info on pay for delete, it sounds like it works on small collection agencies but not large ones especially for student loans! It’s not as easy as it sounds!
Michael Evans says
I have about $20,000 in very old defaulted Federal Student Loans that are in collections and have also aged off of my credit report ages ago. My wages have recently begun to be garnished and I want to put an end to this for once and for all. Should the Collection Agency be receptive to settle, and I pay them off, will the loans reappear on my credit report after all those years, and negatively impact it and my score with say a “defaulted and paid less than owed” tradeline that would tarnish my report for a new 7 year period?
Robert Farrington says
Since they are Federal loans, you can read the settlement options:
1. Waiver of debt collection fees
2. 50% waiver of interest and fees
3. 90% of principal and interest
None of those are ideal settlements. If you’re concerned about the default, you can rehabilitate your loans (recommended) and then work to pay them off.
Jacob says
I have a defaulted private loan with a total balance of over $60,000 including interest and fees. Its under collections and they continue to send letters and telephone me periodically. I’ve never made a payment and it’s been well over 10 years since I took out the loan. My Mother is a co-signor on the loan and is 70 years old living off of social security. Considering the statute of limitations in the State of Oregon, should I be interested in trying to make a settlement?
Robert Farrington says
I think you should consider speaking to a student loan debt attorney to assess the possibility. And also to assess the potential damage to both you and your mother’s assets.