Paying off student loans can feel overwhelming, but with the right strategies, you may be able to negotiate a more manageable solution. Whether you’re struggling with payments or looking to settle your loan for less than the total amount owed, understanding the negotiation process can open up options you didn’t know were available.
Let’s look at how the student loan payoff process works. We’ll explore when negotiation might be a viable option, how to approach lenders, and tips for reaching a favorable agreement.
Key Points
• Before negotiating a student loan payoff, evaluate your income, expenses, and overall financial health to determine how much you can realistically offer toward a student loan payoff.
• Federal and private student loans have different rules for negotiation. Federal loans rarely offer settlements, while private lenders may be more open to negotiating reduced balances.
• For defaulted loans, lenders may accept lump-sum payments or reduced balances to settle the debt, especially if recovery seems uncertain.
• Ensure any negotiated terms are confirmed in writing to protect yourself and avoid misunderstandings regarding the settlement or adjusted repayment plan.
• Another option for a student loan payoff is student loan refinancing, which could lower your interest rate and possibly your monthly payment. Just keep in mind that by refinancing federal loans with a private lender, you’ll lose access to federal benefits and protections.
What Student Loan Settlement Is
Student loan settlement refers to an agreement between the borrower and lender where the borrower pays a lump-sum amount that is less than the total balance owed to settle the debt. This option is generally available for borrowers who are in default or facing severe financial hardship.
You’ll go into default after a certain number of days, depending on your loan type (270 days for some federal loans; Perkins loans go into default immediately).
Defaulting on student loans can lead to several negative consequences, including:
• Your entire unpaid loan balance becomes immediately due (called acceleration)
• Tax refunds and federal benefit payments may be withheld to go toward your defaulted loan(s)
• Garnished wages (your employer must withhold a portion of your pay to send to your loan holder)
• No deferment or forbearance options available to you (more on these later)
• Losing eligibility for other federal student loan benefits, including the ability to choose repayment plans
• Losing eligibility for additional federal student aid
• Damaging credit
• Your loan holder taking you to court, which could result in court costs and collection and attorney’s fees
• Withheld official college transcripts
How Student Loan Settlement Works
Settling loans can reduce what you owe and eliminate future repayment obligations. Here’s how it works in a nutshell:
1. You negotiate with your loan servicer or a collections agency and offer to make a lump-sum payment.
2. The loan servicer or collections agency agrees to the terms.
3. You pay an amount lower than what you owe in outstanding loans, collection fees, and interest charges.
4. The servicer or agency marks the debt as settled, and your loan obligation is satisfied.
5. The default status comes off your credit report (but note that the settlement can still affect your credit).
How to Be Eligible for Student Loan Settlement
You can only qualify for a student loan payoff if your federal student loans are in default. If you have loans in good standing, you can’t qualify for a settlement request. It’s also important to note that federal student loan settlements are rare, because it’s difficult to get rid of student loans even if you go bankrupt.
You might also be able to negotiate a settlement with private student loans if you’re in default (which usually means you’re 120 days late on payments). Check with your lender for a definition of default on your particular private student loans.
Private student loan lenders cannot pursue the money owed them in the same way that federal loan servicers can, so they may be more likely to settle the loan(s).
Recommended: How to Get Student Loans Out of Default
Steps to Negotiating Student Loan Payoff
Can you negotiate student loan payoff? In other words, can you settle student loans?
Absolutely! Read on to learn the steps on how to settle student loan debt.
Step 1: Gather Your Documents
You must show that you can’t repay your student loans, which may include gathering the following:
• Health records, such as your mental or physical illness diagnosis that makes it difficult for you to hold a job
• Pay information, such as pay stubs, W-2 forms, and tax returns
• Financial records, including information about a potential inheritance that could help pay your debts
• Credit reports
Step 2: Contact the Agency and Negotiate Settlement Terms
Your loans typically go into collections after you go into default. You can call or email the collections agency, lender, or loan servicer and tell them you want to settle the debt by paying a portion of the total amount you owe. Describe the challenges you’re facing, such as financial challenges or medical problems.
Federal student loans often offer four settlement options:
• Principal and interest: You only pay the outstanding principal and interest.
• Principal and 50% interest: You pay the outstanding principal and 50% of interest, with collection costs waived.
• 90% principal and interest: You pay 90% of the outstanding principal and interest charges, with collection costs waived.
• Discretionary compromise: You pay less than what you would owe under the other three standard options.
You may be able to settle private student loans for 40% to 70% of the amount you owe. Check with your lender or collection agency for more information.
Step 3: Review and Make Your Payment
You’ll receive a letter about your settlement terms. The letter will outline the amount you have to pay and the deadline. After you receive the letter, make your lump sum payment.
Note that if you don’t pay by the deadline, the agreement will be canceled and you’ll owe the total outstanding amount, interest, and fees. Keep track of all paperwork involved in the settlement.
Alternatives to Student Loan Settlement
Instead of opting for a loan settlement, consider repaying your loans in full. Repaying them in full may prevent you from having to go through loan repayment that could drag on for years. If you can’t repay them in full, consider deferment or forbearance, income-driven repayment plans, or student loan refinancing, which we’ll outline below.
Deferment or Forbearance
A student loan deferment or forbearance might be a good alternative to settlement. Here’s the definition of each:
• Loan deferment: You temporarily stop making payments.
• Loan forbearance: You stop making payments or reduce your monthly payments for up to 12 months.
It’s important to note that both are temporary situations and that you can accrue interest while your loan is in either forbearance or deferment.
Income-Driven Repayment Plan
An income-driven repayment (IDR) plan bases your monthly payments on your income and family size.
There is currently one income-driven repayment plan open to everyone: Income-Based Repayment (IBR). With this plan, borrowers typically pay 10-15% of their discretionary income, with payments adjusted annually. IBR plans offer loan forgiveness after 20-25 years of qualifying payments, depending on when the loans were issued. It’s a helpful option for those with high student loan debt compared to their income, ensuring payments remain affordable.
Note that there are two other income-driven repayment plans available — Pay As You Earn (PAYE) and Income-Contingent Repayment (ICR). However, you must currently be enrolled in the Saving on a Valuable Education (SAVE) plan in order to apply.
Student Loan Refinancing
You may also consider refinancing your student loans instead of negotiating student loan debt. Student loan refinancing means a private lender pays off your existing federal or private student loan(s). A private lender might be a bank, online lender, or another type of financial institution. It’s worth shopping around for a private lender that offers a better:
• Term
• Interest rate
• Monthly payment
Refinancing does have some downsides. You’ll lose access to federal repayment plans (such as the standard, graduated, and extended repayment plans, and income-driven plans) and Public Service Loan Forgiveness, and you’re no longer eligible for federal repayment protections or grace periods (where student loan payments haven’t yet started).
Also, it may not be possible to refinance student loans that are already in default. However, borrowers can rehabilitate or consolidate defaulted federal loans to regain eligibility for refinancing. Private loans in default may require negotiation with the lender before refinancing becomes an option.
Recommended: Does Refinancing Student Loans Save Money?
The Takeaway
If you’re wondering if you can negotiate a student loan payoff, the answer is yes, but it’s often difficult to get approved. Therefore, it’s important to consider all your options, including paying off your entire existing loan balance, refinancing, or another option listed above.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
FAQs
What are the benefits of student loan settlement?
The biggest benefit of student loan settlement is that you pay an amount lower than what you owe in loans, fees, and interest charges. Once you follow the settlement terms, your loan is settled and your obligation to pay the loan “goes away.” The default also gets removed from your credit report.
What are the downsides of student loan settlement?
The largest downside of student loan settlement is simply that they don’t happen that often. Federal loans are extremely difficult to discharge, even in bankruptcy. Student loan settlement can harm your credit score, as settled debts are reported as less than fully paid. Additionally, forgiven amounts may be considered taxable income, increasing your tax liability.
Will settling student loans hurt your credit score?
Yes, settling student loans can hurt your credit score. When a loan is settled for less than the full amount, it’s reported as “settled” rather than “paid in full,” indicating you didn’t meet your original repayment terms. This can negatively impact your credit history and future borrowing potential.
Photo credit: iStock/Jacob Wackerhausen
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