Can You Negotiate a Student Loan Payoff? Yes

#1 Student loan lawyer

Updated on May 12, 2024

Can you negotiate a student loan payoff? Yes. I’ve helped hundreds of borrowers and cosigners negotiate student loan settlements with the Department of Education and private lenders like Navient, Discover, and Sallie Mae. Here are some key takeaways I’ve learned in my work as a student loan lawyer.

Key Takeaways

  • Student loan settlement is usually an option once you fall behind on monthly payments and your loans default. It involves negotiating with the lender or debt collector to pay less than owed on the total outstanding balance.

  • Federal and private student loans have different settlement terms. Private loans typically offer more flexible settlement terms than federal student loan settlements. To settle federal student loans, you must pay the settlement amount within 90 days of reaching an agreement.

  • Settling student loan debt will temporarily lower your credit score. It may also cause you to pay more in taxes. Alternatives such as loan consolidation, refinancing, or student loan forgiveness programs don’t have those consequences.

Ahead, I’ll share with you the process I use to consistently get the lowest student loan settlement offers for my clients.

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What is Student Loan Settlement?

A student loan settlement is an agreement to pay off your loans for less than the total owed. This usually becomes an option when you’ve missed payments and your loans are nearing or in default. The key to getting the best deal from your student loan servicer or collection agency is being able to make a lump-sum payment toward the defaulted loan shortly after negotiating the settlement. Your lender’s policies and your financial situation will also play a role.

You Can’t Settle a Student Loan In Good Standing

It’s impossible to negotiate student loan debt without ruining your credit. That’s because you can’t settle a federal or private student loan that’s in good standing. Settlement only becomes an option after your loans are no longer in deferment or forbearance and you’ve missed several student loan payments in a row.

Why is that?

The simple answer is that lenders have no incentive to settle student loan debt if your account is current.

After all, if your loans are in good standing, they have no reason to accept less than the amount owed. They want to continue interest — no matter how much you originally borrowed or how much you’ve paid.

This is why settlement is only an option when a loan is in or near default.

  • Federal loans default after you’ve missed 270 straight days of payments.

  • Private loans enter default status around 120-210 days of nonpayment.

Related: Can You Settle Federal Student Loans?

Settlement Differences: Federal vs Private Loans

You can settle federal student loans once your account defaults and has been moved from your loan servicer to a debt collection agency. The government used to offer 3 types of settlements or compromises for federal loans.

Standard Compromise

You’ll pay the current principal and half the interest (with a waiver of collection fees), the current principal and half the interest (50%), or 90% of the current principal and interest balance.

Discretionary Compromise

You’ll pay less than any of the 3 standard compromises, but you’ll need to provide evidence of a financial hardship, which includes a copy of your pay stubs, most recent tax return, a financial statement showing your assets and liabilities, and a copy of your credit report.

Nonstandard Compromise

You’ll pay less than the standard compromise, but the collection agency must pay the Education Department the difference between the nonstandard and standard compromise.

They stopped offering those more generous settlements for defaulted federal student loans before the COVID-19 pandemic. Your only option is to pay half of the outstanding interest plus the principal in 90 days.

In contrast, you can negotiate a private student loan settlement for 40-75% of the balance — or even less than that if the statute of limitations is about to run out. And you may be able to pay that in a lump sum, over several monthly payments, or a combination of the two.

How to Settle Student Loans

Negotiating student loan debt involves understanding your loan status, evaluating your financial capacity, and navigating the negotiation process effectively. Here’s a simplified guide:

Assess Your Loan Status

Contact your servicer to check if your loans are in or near default. Beware of offers for forbearance or alternative plans that might restart the negotiation process.

Financial Evaluation

Determine what you can afford to pay toward a student loan debt settlement by reviewing your savings, potential loans, and other financial resources.

Gather Documentation

Gather copies of your paychecks, tax returns, bank statements, credit reports, etc., in case your lender asks to review your income before accepting a debt settlement.

Start Negotiation

Contact the debt collector and discuss repayment options. I typically ask the representative if they’re willing to settle the defaulted loans. If they are, then I ask them if they have an offer. If they do, I ask for the settlement agreement in writing. I then review that offer with my client before making a counteroffer. I’ll typically go back and forth with the creditor several times until we negotiate payment terms my client can afford.

Review and Confirm

Ensure any settlement agreement includes all necessary details and is in writing. Verify loan IDs, your details, and the payment terms.

Settlement Payment

Follow the agreed payment method. Options typically include checks, money orders, wire transfers, or auto drafts. Credit card payments are rarely accepted.

Will Settling Student Loans Hurt Your Credit Score?

Yes, negotiating a student loan payoff will negatively affect your credit. Late payments and a default status will be added to your report for every defaulted loan. These negative marks can remain on your credit report for up to seven years.

How much will your score drop by?

It’s hard to say. I’ve seen clients’ scores drop by anywhere from 50 to 150 points, depending on the number of defaulted loans they have and how strong their score was, to begin with.

Unfortunately, settling student loan debt won’t remove those marks from your credit history. I’ve never seen a student loan settlement include a “pay for deletion” clause whereby the lender agreed to remove the missed payments or to report the debt as paid in full rather than as “paid-settled.”

What I have seen work, however, is using the Fair Credit Reporting Act rules to try to have the negative information removed after paying the settlement. To do that, I recommend working with a credit repair specialist to strategize credit rebuilding. Over the years, I’ve seen many clients’ scores recover to the 700s within a year after paying the settlement amount.

Potential Tax Consequences

Understanding the tax implications following a student loan settlement is important. Here’s what to expect:

  • Receiving a Clearance Letter: Once you pay the settlement loan balance, you’ll get a clearance letter confirming you’re no longer liable for the settled loan.

  • Cancellation of Debt Notice (1099-C): The IRS will send you a 1099-C form, which reports the unpaid part of your student loan as taxable income. You need to include this in your tax returns, which may lead to you paying taxes on the forgiven amount.

  • Avoiding Taxes on Canceled Debt: If you’re considered insolvent (where your liabilities exceed your assets), the IRS has provisions that might let you avoid taxes on the canceled debt. It’s highly advisable to consult a tax professional to determine your eligibility for this exception.

Related: Student Loan Settlement Tax Impact

Where to Get Money to Pay a Student Loan Settlement?

If you’re exploring student loan settlement, it’s important to know where you will get the money from to pursue it, consider these options:

  1. Personal Savings: Using the money in your bank account or 401k is the most straightforward method and can get you the best deal if you have a lump sum.

  2. Borrowing from Family or Friends: A loan from someone you trust can be a good choice, usually without the strict conditions of formal lending institutions.

  3. Personal Loan: Banks or credit unions may offer personal loans, but assessing the terms and interest rates is important to ensure they’re manageable.

  4. Home Equity: If you own property, a home equity line of credit can be a source, but it comes with the risk of putting your home as collateral.

  5. Debt Consolidation or Settlement Companies: Some debt settlement companies specialize in this area, but be cautious of potential fees and the legitimacy of the offers. A lot of people have hired me after they’ve worked with one of these companies (or other “student loan lawyers,” for that matter) for months with no results.

Alternatives to Settling Student Debt

Just because you can settle student loan debt doesn’t mean it’s right for you. Depending on your age, income, and other goals, keeping that lump sum payment in your bank account rather than paying off the federal government or private student loan lenders might be the better move. You’ll keep money in your pocket to take care of your family and address emergencies rather than paying towards a debt you may be able to manage using different options.

Private Loan Options

For example, if you’re struggling to pay private loans, request a deferment or forbearance to temporarily pause the student loan payments, or look to refinance with a new lender. Student loan refinancing can lower interest rates and monthly payments.

But be careful refinancing federal student loans. You could lose access to the benefits and protections the federal government offers its student loan borrowers such as loan forgiveness and reduced payment plans.

Federal Loan Options

If you have federal loans, consider switching to one of the income-driven repayment plans. I’ve seen many people cut their student loan payments by more than after switching to an IDR Plan like SAVE.

You can also check out student loan forgiveness programs such as Public Service Loan Forgiveness (PSLF). These programs can wipe out your loan balance in a few short years if you qualify.

You may need to consolidate to get access to these programs. You can consolidate for free on the Federal Student Aid website,

Bottom Line

Negotiating a settlement for defaulted student loans can be complex and daunting, but you don’t need to go at it alone. If you’re seeking experienced guidance, consider booking a call with my team and me.

Over the past decade, we’ve helped hundreds of borrowers explore their settlement options, saving them millions in student loan debt. We’re ready to help you do the same, no matter your financial situation. So whether you can pay the settlement with a lump sum payment or need longer than that, we’ll find a path that works for you.

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Can you negotiate a student loan payoff?

Yes, you can negotiate a loan payoff for private and federal loans, either on your own or with the help of third-party professionals. Negotiating can help you settle the debt for an amount that’s less than your current balance.

Is it worth it to aggressively pay off student loans?

Aggressively paying off private student loans can help avoid excessive interest charges, but it may not be worth doing the same for federal loans due to their benefits and protections. But paying off student debt early can save on interest, improve debt-to-income ratio, and free up funds for other financial goals like buying a house or saving for retirement.

How do you lower the amount you pay in student loans?

You can lower the amount you pay in student loans by switching to one of the income-driven repayment plans, extending your repayment term, or lowering your interest rate.

How does settling a student loan affect my credit score?

A student loan debt settlement can negatively impact your credit score by adding late payments and a default status to your credit report.

Should You Counter a Settlement Offer from a Private Student Loan?

Yes, countering a private student loan settlement offer is often advisable. Evaluate the initial offer against your financial ability and settlement goals. Countering can lead to more favorable terms, but ensure your counteroffer is realistic based on your financial situation and the lender’s likely expectations.

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