If you’re struggling with student loan debt, you may be considering the idea of pursuing a student loan settlement. But is it really possible to settle student loan debt for less than you owe?
In many cases, probably not. However, there are ways for some borrowers to get a student loan settlement if you’re in dire circumstances — though the risks might outweigh the rewards. Here’s what you need to know — plus other ways to help lower student loan payments.
Table of Contents
Key Points
• With a student loan settlement, borrowers settle their debt with lenders for less than they owe on it.
• Default is required for federal loan settlements, leading to negative credit impacts.
• Private lenders typically offer more flexible settlement terms than federal loans.
• Income-driven repayment plans and forgiveness programs provide alternatives to manage payments.
• Refinancing can lower payments but may result in loss of federal benefits.
What Is a Student Loan Settlement?
A student loan settlement is settling your debt for less than what you owe on it and then making affordable repayments.
Settlements probably aren’t an option for people who make on-time, minimum payments. A lender isn’t likely to accept a settlement for less than what you owe if they have reason to believe you will eventually be able to pay back the entirety of the loan.
Typically, you can consider a settlement if your student loans are in default. Once a federal student loan is in default, the entire balance comes due immediately, unlike loans in good standing, where you’ll have a minimum payment due each month.
Federal Student Loan Settlement
If you have student loans that you’re looking to settle, you first need to make sure you qualify to do so. You’ll need to currently be in default, which generally happens when you miss loan payments for 270 days. Default can negatively impact your credit score, making it difficult to obtain loans or credit, your wages may be garnished, and the lender may send your loan to collections.
A settlement for federal student loans is typically less common since the Department of Education can garnish your wages or offset your tax refunds to collect what you owe. When a settlement for a federal loan is possible — which typically occurs only after all other collection methods have been tried — it’s called a compromise. It means you’re making a deal to pay off your loan for less than what you borrowed.
This is different from student loan forgiveness, which cancels your loans under certain circumstances.
For a federal student loan settlement (or compromise), loan servicers typically have three potential options:
1. Waiver of fees. You’re now only responsible for the principal balance and interest, not the fees.
2. Half interest and fees waived. All your fees are waived, plus 50% of the interest. You’re only responsible for the other 50% of interest and the principal balance.
3. 10% of principal balance and fees waived. You’re responsible for 90% of the principal balance and remaining interest.
Settling Private Student Loans
If you have private student loans that you want to settle, your options are a bit different than federal loans. Your settlement will depend on your lender and what terms they are willing to accept. Each private lender is different, so you will have to contact them directly and ask their terms for settlement — if they accept settlements at all.
Alternatives to Student Loan Settlements
A student loan settlement is not without consequences. Your credit will likely take a hit when the loan is in default and also once it is settled. However, if your loans aren’t in default, there may still be other ways for you to avoid default and lower your monthly payments.
1. Income-driven repayment plans (IDR)
For federal student loans, you can see if you qualify for an income-driven repayment (IDR) plan. There are currently three options to choose from: Income-Based Repayment, Pay As You Earn (PAYE), and Income-Contingent Repayment. They all vary based on the details of your financial situation, like your discretionary income and family size.
Just be aware that IDR plans are scheduled to close in 2026. Beginning in summer 2026, borrowers will have only two repayment plans to choose from, including one new plan called the Repayment Assistance Program that is similar to an IDR plan.
2. Student loan forgiveness programs
There are ways federal student loans can be forgiven — if you qualify. With forgiveness, your loans are canceled, and you don’t have to pay off a balance, as you would with a settlement.
If you work in public service, education, healthcare, and some other sectors, you may be eligible for federal student loan forgiveness. To take advantage of certain federal programs, like Public Student Loan Forgiveness, you need to make 120 qualifying monthly payments under an eligible repayment plan and work for a qualifying employer to be eligible.
3. Discharging a loan
Getting your student loan discharged isn’t the same as forgiveness, but it does mean your loan may get partially or completely canceled. You may qualify if you’re permanently disabled, your school closed, or, possibly, you file for bankruptcy. If you’re a veteran with a service-related disability, you receive Social Security Disability Insurance, or your doctor has diagnosed your disability, you might qualify to have your loan discharged.
If you have federal loans, and you feel your school “misled” you, promising jobs or certain salaries after graduation, you may qualify to apply for Borrower Defense Discharge through the Department of Education. Although a federal court has issued an injunction against the borrower defense discharge program, delaying payments, borrowers can still submit an application.
Student Loan Refinancing
When you have a few different student loans, it can be overwhelming to pay them all on time every month. And with varying interest rates, it can get confusing.
Refinancing your student loans replaces all of your loans with one new one. You get new terms and a new interest rate. Your new interest rate is usually determined by your credit score; ideally if your credit is strong, you might qualify for a lower rate.
If you’re having trouble meeting the minimum requirements, you could consider trying to get a student loan cosigner.
Refinancing could be an option to consider if you’re struggling to make your payments on time every month. Refinancing may help you lower payments and possibly your interest rate, depending on your terms. (You may pay more interest over the life of the loan if you refinance with an extended term.) Check out our student loan refinance calculator to get an idea of how refinancing could help your student debt situation.
It’s important to note that refinancing federal loans with a private lender means you would lose out on any federal benefits, including access to income-driven repayment programs or potential student loan forgiveness.
The Takeaway
While student loan settlements are rare — especially for federal loans — there are other options for borrowers who are struggling to pay their loans. If you have federal loans, you can currently apply for an income-driven repayment program and in some extreme cases, you may qualify for your loan to be discharged. Another option you may want to consider is student loan refinancing.
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.
FAQ
Can you negotiate a settlement on student loans?
Yes, it is possible to negotiate a settlement on student loans to pay off your loan for less than you borrowed. In general, private lenders have more flexibility to negotiate, though each one will determine the specific settlement terms they are willing to accept. Contact your lender to discuss your options.
A settlement for federal student loans is typically less common since the Department of Education can garnish your wages or offset your tax refunds to collect what you owe. A settlement typically only occurs only after all other collection methods have been tried, and it’s referred to as a compromise.
How is the student loan settlement figure calculated?
You’ll need to negotiate a private student loan settlement with your lender. For a federal student loan settlement (called a compromise), loan servicers typically have three potential options to offer: the borrower is only responsible for the principal balance and interest, not the fees; the borrower is only responsible for 50% of interest and 50% of the principal balance; and the borrower is responsible for 90% of the principal balance and remaining interest.
Is it possible to negotiate a lump-sum payoff of student loans?
It may be possible to negotiate a lump-sum payoff of student loans, but only after the loans have gone into default. To pursue this option, a borrower will typically need to negotiate with their loan servicer and demonstrate serious financial hardship. It’s generally easier to negotiate a lump-sum payoff of private student loans than federal student loans. Lump-sum payoffs for federal loans are fairly uncommon.
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