For the past seven years, Kat has been helping people make the best financial decisions for their unique situations, whether they're looking for the right insurance policies or trying to pay down debt. Kat has expertise in insurance and student loans.
Kat Tretina Personal Finance WriterFor the past seven years, Kat has been helping people make the best financial decisions for their unique situations, whether they're looking for the right insurance policies or trying to pay down debt. Kat has expertise in insurance and student loans.
Written By Kat Tretina Personal Finance WriterFor the past seven years, Kat has been helping people make the best financial decisions for their unique situations, whether they're looking for the right insurance policies or trying to pay down debt. Kat has expertise in insurance and student loans.
Kat Tretina Personal Finance WriterFor the past seven years, Kat has been helping people make the best financial decisions for their unique situations, whether they're looking for the right insurance policies or trying to pay down debt. Kat has expertise in insurance and student loans.
Personal Finance Writer Rachel Witkowski Correspondent/EditorRachel Witkowski is an award-winning journalist whose 20-year career spans a wide range of topics in finance, government regulation and congressional reporting. Ms. Witkowski has spent the last decade in Washington, D.C., reporting for publications i.
Rachel Witkowski Correspondent/EditorRachel Witkowski is an award-winning journalist whose 20-year career spans a wide range of topics in finance, government regulation and congressional reporting. Ms. Witkowski has spent the last decade in Washington, D.C., reporting for publications i.
Written By Rachel Witkowski Correspondent/EditorRachel Witkowski is an award-winning journalist whose 20-year career spans a wide range of topics in finance, government regulation and congressional reporting. Ms. Witkowski has spent the last decade in Washington, D.C., reporting for publications i.
Rachel Witkowski Correspondent/EditorRachel Witkowski is an award-winning journalist whose 20-year career spans a wide range of topics in finance, government regulation and congressional reporting. Ms. Witkowski has spent the last decade in Washington, D.C., reporting for publications i.
Correspondent/EditorUpdated: Sep 16, 2021, 11:57am
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While Congress has provided significant relief to millions of student loan borrowers in response to the Covid-19 pandemic, these efforts have done little to address the many borrowers in default. According to Federal Student Aid, there were 5.3 million borrowers in default as of the end of March 2021. Combined, those borrowers owed $116.6 billion—approximately 7% of the nation’s $1.6 trillion student loan debt.
If you’ve defaulted on your student loans, there is a chance you can settle your student loan debt for less than you owe. However, negotiating student loan payoff terms can be a time-consuming and expensive process. We’ll walk you through how it works.
If you have a large student loan balance, settling loans is a way to reduce what you owe and eliminate any future obligation to repay the loans.
Student loan settlement is a process where you negotiate with your loan servicers or collection agencies and agree to make a lump-sum payment. If the loan servicer or agency agrees to the terms, you will pay an amount that is lower than what you owe in outstanding loans, collection fees and interest charges.
Once you’ve followed the terms of the settlement, the loan is marked as settled, and your obligation for the loans is satisfied. The default status will be removed from your credit report, but the settlement can still affect your credit.
You can negotiate a student loan payoff, but it depends on the current status of your loans. If your loans are in good standing, lenders won’t consider a settlement request. Adam Minsky, an attorney specializing in student loan law, says you’re eligible for student loan payoff only if your loans are in default.
“In most cases, only defaulted student loans can be settled or negotiated,” he says. “Defaulting can have very serious consequences including penalties or fees, negative credit reporting, collections and litigation.”
Federal loan settlements are possible, but they’re extremely rare. That’s because federal student loans are difficult to discharge in bankruptcy, and loan servicers can take aggressive measures to collect payments.
If you’ve defaulted on your federal student loans—typically meaning you’re at least 270 days late on payments—loan servicers can send your account to collections, garnish your wages and even seize your tax refund.
Because they have multiple ways to recoup their money, federal loan servicers have less incentive to negotiate with borrowers. You can only qualify in extenuating circumstances, and you’ll still have to pay the majority of your debt.
“It is possible to settle federal loans that are in default,” says Minsky.” But the settlement would have to be in a lump sum, and federal guidelines limit how much of a balance reduction you can get through a settlement involving defaulted federal student loans. In many cases, this results in only a marginal benefit.”
With private student loans, you may be able to negotiate a settlement if you are in default. This usually means you’re 120 days late on payments, but timelines vary by lender.
When it comes to negotiating student loan debt, it’s important to know that private student loan lenders don’t have the same options as federal loan servicers to collect the money owed, and they may be more likely to settle your loans. But this also depends on the lender, age of the debt, the circumstances for the settlement and the borrower’s legal dispute.
While there are some differences between settlements of federal and private student loans, the student loan payoff process will generally require the following steps:
When you request a student loan settlement, you usually have to show that you can’t repay the loans through other methods, including alternative payment plans.
To make your case, collect the following documentation:
If your loans are in default, your lender has likely sent your account to collections. The collections agency is responsible for contacting you and attempting to get repayment. If the agency has contacted you, you can call or email them. You can contact your lender or federal loan servicer if you aren’t sure of the collections agency.
Not sure who your loan servicer is? You can find out with the National Student Loan Data System or by reviewing your credit report at AnnualCreditReport.com.
When you talk to the collection agency representative, tell them that you would like to settle the debt by paying a portion of the total amount owed. If you have defaulted on your loans because of a financial hardship or medical issue, include those reasons.
There are four settlement options for federal student loans:
