How To Negotiate A Student Loan Debt Settlement

Student loan borrowers carry an average federal student loan debt balance of $37,853. When private student loans are added to the equation, the average increases to $40,681.

If you’re drowning in student loan debt and struggling to keep up with payments, you might wonder if there’s a way to settle for less than what you owe. Sometimes, lenders may be willing to negotiate a settlement — allowing you to pay a reduced amount to clear your debt.

Understanding how student loan debt settlement works, when it’s an option and how to approach negotiations can make all the difference in qualifying. In this guide, we’ll break down the process, explore your chances of success and provide practical tips to help steer you toward a better financial future.

What student loan debt settlement is and how it works

Student loan settlement is when you make a lump-sum payment to close out your student loans for less than the amount you owe. If your student loans are in default, your lender might be willing to accept less than the full amount rather than take the risk that you will stop paying entirely.

Student loan settlements are more common with private loans than federal ones. The government has strong collection tools — such as wage garnishment and tax refund offsets —so federal loan servicers are less likely to negotiate. On the other hand, private lenders might be more flexible, especially if they think they won’t recover the full amount through collections. However, you usually need to offer a large lump-sum payment to incentivize your lender to accept less than the full amount.

For example, if you have $30,000 in student loans, you might offer to pay $25,000 now if the lender will forgive the remaining $5,000. This would settle the debt for far less than you owe, but you would need the cash to make such an offer. The amount of debt that can be forgiven varies by lender. Not all student loan lenders are willing to entertain settlement offers.

You might want to consider a student loan settlement if:

• Your loans are in default (or near it).
• Your loans have been sent to collections.
• Your credit is already at rock bottom.
• The alternative is a court judgment.
• You have access to cash that can be a lump-sum payment to settle your outstanding debt.

How to be eligible for student loan settlement

You might qualify for federal student loan debt settlement if:

• You can’t afford the loan. You must prove you don’t make enough money to repay your loan. This typically requires submitting pay stubs or recent tax returns as proof of income. You may also need proof of your other expenses (like recurring bills, bank statements and a lease agreement) to explain where your income is going.
• You haven’t paid your loans for several months. Most federal student loan servicers consider your loans in default after you’ve failed to make payments for 270 consecutive days, while private student loans are often considered in default after 90 to 120 days. Note that missing payments will severely impact your credit score.
• You’ve re-defaulted. If you’ve defaulted on the same loan more than once, settlement may be a last resort for getting out of debt.

Steps to negotiating student loan settlements

You can negotiate a student loan payoff, but your loans must either be in default or near default. Some lenders may suggest an alternative repayment plan before entertaining settlement offers.

If you have explored other options and found that a settlement is your best bet, you can take the following steps to negotiate a student loan settlement.

1. Gather required documentation

Lenders are more likely to negotiate if you’re experiencing financial hardship and have a legitimate reason for being unable to pay. Gather proof of your situation — such as job loss, medical bills or other financial burdens — demonstrating why you can’t repay the full amount.

This documentation might include:

• Bank statements
• Childcare expenses
• Credit card statements
• Medical bills
• Paystubs
• Rent or mortgage payments
• Tax returns

2. Know your options

Reach out to your loan servicer or lender to ask about settlement options. Be prepared for pushback, especially with federal loans. If you’re dealing with a collection agency instead of the original lender, they may be more willing to settle, but they’ll also try to get as much money as possible.

If you haven’t paid your loans for several months, the lender may consider accepting less money rather than losing everything if you stop paying. A few standard compromise options exist for getting out of student loan default are:

• 90 percent of the current balance of principal and interest
• The principal and half of the unpaid interest that has accrued since the loan went into default
• The remaining principal and interest without any collection charges

You may qualify for a “discretionary compromise.” This amount can be lower than the standard compromise amounts, but the Department of Education must approve it.

The amount you could save through student loan settlement depends on several factors, including:

• How much you owe
• Outstanding collection charges and late fees
• How far behind you are on payments

A settlement may waive late fees, collection costs, a portion of the interest and even part of the principal balance.

3. Negotiate the terms of the settlement

Allowing the lender to make the first offer gives you the advantage: You know the starting point for negotiations.

To get your lender to make the first offer, explain your situation, then ask open-ended questions like “What are my options at this point?” or “How can we settle this debt?”

Then, you can accept the offer or make a counteroffer.

4. Request a paid-in-full statement

Never make a payment until you have a written agreement that clearly outlines the terms of the settlement. This should include the amount you’re paying, the deadline for payment and confirmation that the lender will consider the debt settled once payment is received.

Have a lawyer review the terms with you, and save your paid-in-full statement in case lenders or debt collectors try to request money from you later. You might also need your statement to request an update on your credit report or when filing your tax return.

Alternatives to student loan settlement

Student loan debt settlement is typically a last resort. Most people who default on loans don’t have access to the lump sum needed to settle the debt. Also, defaulting on your loan will negatively impact your credit score for years.

A damaged credit score could prevent you from borrowing money or cost you more money on future loans by requiring higher interest rates.

Before settling your student loans, try getting back on track with your payments in other ways.

Deferment or forbearance

If you’re facing short-term financial hardship, deferment or forbearance can temporarily pause your loan payments. Deferment is often available for federal loans if you’re in school, unemployed or experiencing economic hardship. Forbearance is another option, though interest continues to accrue, increasing your total balance.

Income-driven repayment plans

Available with federal student loans, income-driven repayment (IDR) plans base your payments on 10 to 20 percent of your discretionary income.

If you don’t have a job, you could pay as little as $0 without facing any penalties, fees or harm to your credit. Your remaining balance will be forgiven after 20 or 25 years of payments.

Refinancing

If you have good credit and stable income, refinancing your student loans with a private lender could lower your interest rate and reduce your monthly payments. However, be careful — if you refinance federal loans with a private lender, you’ll lose access to government protections like IDR plans and loan forgiveness.

The bottom line

Settling your student loan debt can provide financial relief, but it’s not always the best option. Even if a settlement is possible, it can negatively impact your credit and may result in tax liabilities on the forgiven amount. Before pursuing this path, it’s important to explore alternatives like income-driven repayment, loan forgiveness or refinancing, which could offer long-term relief without the downsides of settlement.

If you’re considering a settlement, contact your lender to discuss possible options — and be prepared to negotiate. If you reach an agreement, always get it in writing before making any payments.

Taking the time to explore all your options and carefully considering the financial impact of settlement will help you make the best decision for your financial future.

Frequently asked questions

• What are the potential benefits of student loan settlement?
  

  Student loan settlement can help reduce the total amount owed, provide financial relief for borrowers in default, and allow for a faster resolution of debt, potentially avoiding long-term collections or legal action.

• What are the potential downsides of student loan settlement?
  

  Student loan settlement can negatively impact your credit score and may result in tax liabilities on the forgiven debt. It also typically requires a large lump-sum payment and is rarely an option for federal loans.

• When can I settle my student loans?
  

  You typically must wait until your student loans are in default before attempting a settlement. Rather than waiting until that point, explore other options that offer better outcomes, such as deferment, refinancing and income-driven repayment plans.

• How much does student loan settlement cost?
  

  The cost of settling a student loan varies based on the lender, loan type and financial situation. Private lenders may agree to settlements ranging from 50 percent to 90 percent of the outstanding balance. Federal student loan settlements are less common, but when they occur, they typically require repayment of the principal plus some or all accrued interest.

  If you work with a debt settlement company or attorney, fees can range from 15 percent to 25 percent of the settled amount.

  You’ll also have late payments and other fees inflating the overall debt amount.

• What happens if you never pay your student loans?
  

  Failure to repay student loans has severe financial consequences. Missing payments can result in late fees, penalties and long-term credit score damage, disqualifying you from future loans, housing rentals and even jobs. If you miss enough payments, your lender can file a lawsuit against you. Courts may sometimes authorize lenders to seize your tax refunds and garnish your wages to repay the debt.