How to Negotiate a Settlement of Your Student Loan Debt

Struggling to pay your student loan debt? You may be able to settle for less than you owe. Find out how to negotiate a settlement of your student loan debt.

It can be hard to juggle your financial obligations, especially if you have demands such as rent, utility and loan payments. Although it may be tempting to miss a student loan payment or two, not paying can have major consequences

If you are struggling to make your monthly payments, there may be some relief in sight. You can choose to settle with lenders and collection agencies to pay less than you owe or negotiate a student loan payoff. 

In general, those who are in loan default or close to it and who likely would need to file bankruptcy otherwise may be best suited for a student loan debt settlement. If that’s you, you’ll want to learn exactly what it is, whether it's the right move and how to get started. 

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What Is Student Loan Debt Settlement?

Student loan debt settlement is the act of settling your student loan debt for less than you owe. Depending on your loan and lender, you may be able to negotiate a settlement agreement if you have a lump sum of cash saved. 

Settling your student loans may be a smart idea if you've repeatedly missed payments and you’re in default and have the means to pay off a decent chunk of your debt immediately. Keep in mind, though, that not all lenders will settle loans, nor are they obligated to do so. 

Student loan borrowers tend to opt for settlement because it helps them avoid alternatives such as filing for bankruptcy and save money on their loans. However, the exact amount you’ll save will depend on your lender. While many will require that you pay around 90% of what you owe, some may settle for much less than that. 

When Is It Possible to Negotiate for a Settlement on My Student Loans?

You probably won’t be able to settle if you’ve consistently made on-time payments. In most cases, you won’t be able to settle until your student loan is considered to be in default. That’s because lenders want to know they don’t have any other options to collect what’s owed. 

Student loan debt settlement for federal loans may be possible if you meet the following criteria:

  • You can’t pay:  Borrowers will need to prove they can’t afford to pay their student loans by providing documentation such as recent tax returns or pay stubs.
  • You defaulted again: Borrowers may not be able to exhaust options such as deferment, forbearance, rehabilitation or income-driven repayment plans if they default on the same loan more than once. 

Private student loans will have different requirements to reach a private student loan settlement. For instance, many private loans are considered in default if you’ve passed the 120-day mark of nonpayment (it’ll depend on your lender). Borrowers will need to prove they don’t have the means to pay back their loans and may be able to negotiate a settlement.

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How to Negotiate a Settlement on Your Student Loan Debt

Before you start, you need to ensure you will likely be successful in your negotiation efforts. That means you need to have defaulted loans or be really close to defaulting on your student loans before attempting to negotiate.

With that in mind, here are some best practices you can follow.

Understand Your Options

You’ll need to figure out what your settlement options are. For instance, many private lenders will require you to pay a minimum of 90% of your current loan balance, while others may be less stringent. Though it isn’t always the case, the longer you’ve gone without making a payment, the less you might have to pay.

Federal student loans from the U.S. Department of Education, on the other hand, offer a few standard choices:

  • 90% of your current principal and interest balance.
  • Half of accrued unpaid interest from when the loan went into default and the entire principal balance. 
  • Remaining principal and interest balance with no collection charges.

Granted, you may be offered a settlement offer that feels less than desirable. If that’s the case, weigh your options carefully, because a settlement could still be better than the other options.

Allow Your Lender to Make the First Offer

It might be smart to let your lender initiate the offer even if you know what your options are. That way, you can review it and decide whether to counteroffer or accept the offer. 

In any case, it’s a starting point. 

You can approach your lender by asking what your options are or how you can rectify your loan situation after explaining what’s going on with your finances. 

Ask for a Paid-in-Full Statement

Before agreeing to anything, you’ll want to get the lender’s offer in writing since it’s not part of your initial loan agreement. To ensure you understand what you’re getting into, seek the assistance of an experienced attorney to review the written offer. 

If you like what you see, you can pay off the settled amount in full. Then, request a paid-in-full statement so you know you’ve officially settled your debt. If not, the lender may attempt to get you to pay off more of your outstanding loan amount.  

You’ll also want to request an update when you file your taxes, especially if the lender intends to send you a 1099-C form. This document shows that the lender canceled your loan, which may count as taxable income. Asking for an update to your credit report is also a smart idea.  

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How Much Will I Need to Pay After I Settle?

The exact amount you’ll need to pay will depend on your lender and what you’ve negotiated. When you and the lender or collection agency agree to a settlement, you pay this amount in one installment, or a lump sum payment. Again, it can be as high as around 90% of your remaining loan balance or as low as less than half of what you owe. 

Regardless of the amount you settle for, you may still have to pay interest and collection costs until the settlement is complete. Plus, settlement could severely impact your credit score, which could affect interest rates for future loans. A higher interest rate means you’ll need to pay more over the life of a loan. 

Settlement should probably be your last resort when it comes to finding ways to pay back your student loans. Yes, there are benefits, but settlement can negatively impact your credit. Consider alternatives such as refinancing your loans through Juno to get back on track with loan payments. 

Sarah Li Cain

Written By

Sarah Li Cain

Sarah Li Cain is a finance writer and a candidate for the Accredited Financial Counselor designation whose work has appeared in places like Bankrate, Business Insider, Financial Planning Association, Investopedia, Kiplinger, and Redbook. She’s the host of Beyond The Dollar, where she and her guests have deep and honest conversations about money affects their well-being.


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