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Can you negotiate student loan debt?
You can negotiate student loan debt, but only if you're in default. Neither federal loans nor private loans will accept a settlement while your loan is in good standing.
With federal student loans, you'll have to wait until your loan moves from your loan servicer to the Department of Education to a collection agency.
With private loans, settlement typically becomes an option after you miss 6 consecutive monthly payments.
Click here to read more about Why You Can't Settle Student Loans in Good Standing?
Will student loans settle for less?
Both federal loans and private loans will settle for less than the loan amount. Typically federal loans will accept 85% of the loan balance less collection charges. Private loans usually accept somewhere between 40-75% of the loan balance.
How do you negotiate student loan debt down?
Here's the process for negotiating a student loan payoff:
- default on your repayment plan (i.e., fail to make payments)
- wait for your federal loans/private loans to go to a collections unit/debt collection agency
- review your finances (how much do you have available in a lump sum? how much can you afford to pay each month?)
- contact the collector and ask for settlement options
- make a settlement offer
- wait for the offer to be rejected, countered, or accepted
- if accepted, wait to get the written settlement agreement before making a payment.
Federal student loan settlement negotiations are straight-forward for most borrowers.
You make an offer. They'll either accept or reject and counter.
When they counter, that offer will typically be the lowest amount you'll get.
Negotiations for private loans can get a little more complicated. You offer. They reject. They may or may not counter. You wait. You make another offer. Your loan is moved to a different debt collector. You start again.
It's a lot.
My advice? Stay persistent and keep notes.
How to settle student loan debt settlement
You have to default to settle student loan debt.
That means you have to stop making student loan payments and cannot be in a deferment or a forbearance.
And this of course means your credit history, credit report, credit score, etc. will all take a hit.
There's no way around it.
Until you default, neither the US Department of Education nor your private loan holder will accept payment for less than the loan balance.
Once you default, the strategy to negotiating a settlement turns on whether the loan is federal or private.
How to settle federal student loan debt
With federal loans, there's not much of a strategy; it's just dealing with the collection agency.
When you call and ask about your settlement options, the agent will typically ask if you can pay the loan balance in full. If you say no, they'll ask can you afford to pay a compromise amount. The compromise amount is the federal government's settlement offer. You can try countering that amount. They may come down slightly.
Federal Student Loan Settlement Options
- Payment of the principal balance, plus accrued unpaid interest, with waived collection charges
- Payment of the total principal, plus half your interest balance.
- Payment of 90 percent of the total balance, including principal and interest.
One thing I like to do if I know my client can make a lump sum payment immediately is to ask to make the payment in 10 days. Depending on the interest rate, paying fast may drop the settlement amount a few thousand dollars.
I did that recently for my client Ricardo.
By moving his payment date from 90 days to 7 days, we save him another $20 thousand.
Federal student loan settlement saved $100 thousand
Federal student loan settlement letter with Professional Bureau of Collections of Maryland (PBCM)
How to negotiate a private student loan settlement
The key to settling private student loan debt is to know three things:
- who the loan holder is
- how much you can afford in a lump sum payment
- how much you can afford to pay each month
If your loan is with a servicer like AES, you'll need to wait until the loan is sent to the debt collection agency or loan holder before you can negotiate. You typically can find out who the loan servicer's point of contact is simply by asking the representative.
Private student loans with Navient are usually owned by Navient. So you'll settle with Navient.
Once you know who ultimately controls the loan, you need to wait until your loan is sent to them before you start negotiating.
After it gets there, you'll want to make your offer.
Over-Sharing About Personal Finances
With my clients, I try to avoid sharing details about their finances, employment status, etc. I let them rely on the information in my clients' credit reports. My belief is simple: the less the loan holder knows about my clients' finances, the better.
They'll either accept, reject, or counter.
There may be a lot of back and forth and tough talk. That's okay. Just remember, time is on your side.
The longer you wait, the closer you get to the statute of limitations. And the closer you get to the statute of limitations, the better the settlement may be. (Of course, your credit score is taking a hit that whole time, so be mindful to make any big finance purchases before going down this path.)
Click here to read How I Settled Erica's Student Loans with Navient
Should I strategic default on private student loans?
Strategic default on private student loans may make sense if you cannot afford the monthly payments or if you've made loan payments for years and the loan balance has only increased.
Before you do that, consider refinancing with a different private lender. Depending on your credit history, you may be able to get your student loan cosigner removed and a lower interest rate.
The dangers of pursuing this strategy are:
- harm to the credit reports for you and your cosigner
- increase in your loan balance due to collection fees/collection costs
- increase in collection calls
Unlike federal loans, private loans can never offset your Social Security benefits or take your income tax refund, for defaulted loans. Nor can they can start a wage garnishment without a court judgment. So that means they have to sue you before they can garnish your paycheck.
What happens after you pay the student loan debt settlement?
After you make your final payment under the terms of your settlement, you should receive a debt clearance letter.
The debt clearance letter will acknowledge that you've paid off the loan according to the settlement terms.
You'll also likely get a cancellation debt notice at the end of the year from the IRS. The cancellation of debt notice will show the potential taxable income that will be added to your income on your tax return.
I say potential because you may be able to apply for a waiver to avoid paying taxes on the income.
Speak with a qualified tax professional to learn if you're eligible for the tax liability waiver.