The idea of never making another student loan payment may be enticing enough to make your lender an offer. But is it possible to settle student loan debt for less than you owe?
In most cases—probably not. However, there are ways to get a student loan settlement if you’re in dire circumstances—though not everyone gets the chance and the risks might outweigh the rewards. We’ll walk you through some options.
Before we dive in, it’s important for you to know that this is an incredibly complex topic. We’re going to try to break it down the best we can, but please understand that this info is general in nature and does not take into account your specific objectives, financial situation, and needs; it should not be considered advice. SoFi always recommends that you speak to a professional about your unique situation.
What Is a Student Loan Settlement?
Let’s start at square one. 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 settlement is 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 means that, if it hasn’t already, your loan will go to collections or a debt collector.
A settlement means you’re making a deal to pay off your loan for lower than what you borrowed. This is different than student loan forgiveness, which cancels your loans under certain circumstances.
For federal student loan settlement, there are three potential options to exit default:
1. Waiver of fees. You’re now only eligible 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. So 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.
Your selection will vary depending on the type of loans you have, your financial situation, and your loan servicer. Most of the time, new loan balances are due within a single fiscal year after the new settlement agreement. New terms will vary, but keep in mind that your new balance must be paid in full by the new deadline.
Settling Private Student Loans
If you have private student loans that you’re looking to settle, your options are a bit different than federal loans. Your settlement will depend on who your lender is and what they are willing to accept. Each private lender is different, so you would have to contact them directly and ask their terms for settlement—if they accept settlements at all.
Alternatives to Student Loan Settlements
Settlement is not without consequences. Your credit will likely take a hit when the loan is in default and once it is settled. But if your loans aren’t in default, there may still be other ways for you to lower your monthly payments.
1. Income-driven repayment plans (IDR).
For federal student loans, you can see if you qualify for an IDR. There are plenty of options: Income-Based Repayment, Pay As You Earn, and Income-Chosen Repayment, among others. They all vary based on the details of your financial situation, like your income and family size.
2. Student loan forgiveness programs.
There are plenty of ways federal student loans can be forgiven—if you qualify. This is where your student loans are cancelled and you don’t have to pay off a balance in a given time, as you would with a settlement.
If you work in public service, education, healthcare, and some other sectors, you have options for student loan forgiveness. To qualify for certain federal programs, like Public Student Loan Forgiveness, you’ll need to have made 120 qualifying monthly payments and work for a qualifying employer to be eligible.
3. Discharging a loan.
Getting your loan discharged isn’t the same as forgiveness, but it does mean your loan may get partially or completely cancelled. You may qualify if you’re disabled, your school closed, or, possibly, you file for bankruptcy.
Getting your student loan discharged is uncommon, but you still might be eligible under certain circumstances. 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.
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 student 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. If you’re having trouble meeting the minimum requirements, you could consider trying to get a cosigner.
Refinancing is a good option 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. Check out our student loan refinance calculator to get an idea of how refinancing could help your student debt situation.
You may be surprised how much refinancing your debt can shrink your monthly bill.
It’s important to note that refinancing with a private lender means you would lose out on any federal benefits.
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.