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.
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 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.
💡 Quick Tip: Enjoy no hidden fees and special member benefits when you refinance student loans with SoFi.
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 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, 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. 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.
Which option you choose will depend 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 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 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 income-driven repayment plan. There are four options to choose from: Income-Based Repayment, Pay As You Earn (PAYE), Saving on a Valuable Education (SAVE) Plan, and Income-Contingent Repayment, among others. They all vary based on the details of your financial situation, like your income and family size.
The Department of Education recently started a new IDR program called SAVE. With this program, borrowers can pay as little as 10% of their discretionary income toward their monthly student loan payment, and their loans will be discharged after 20 years for undergraduate loans, and 25 years for graduate loans. Starting in July 2024, eligible borrowers in the SAVE plan will be able to pay 5% of their discretionary income toward their monthly federal loan payments and their loans will be forgiven in as little as 10 years, depending on their total loan balance.
2. Student loan forgiveness programs
There are plenty of 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 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 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. As of July 2023, the Biden administration has approved $14.7 billion in relief for 1.1 million borrowers who claim their colleges took advantage of them or the schools closed abruptly. In August 2023, a federal court issued an injunction against the borrower defense discharge program, delaying payments, but 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 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. (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 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.
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 apply for an income-driven repayment program and in some extreme cases, you may qualify for your loan to be discharged. Another option is student loan refinancing, though as mentioned above, if you refinance your federal loans you’ll lose access to certain federal benefits.
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.
SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.
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