Before you begin negotiating, contact your student loan servicer to determine whether your loans are near or are already in default.
Be careful: when you contact the servicer, they may offer you a forbearance or alternative repayment plan, such as interest-only payments for a limited time. Accepting one of those options may bring your account current and restart the negotiation process.
Here are 5 steps to negotiate a student loan settlement.
Step 1 – Know what you can afford
Check your finances to know how much cash you can put your hands on and when it will be available. Look at your savings, 401k, inheritance, credit card cash advance limits, family members, pay stubs, and monthly expenses to learn what you can afford in a lump sum and per month.
Depending on your credit, you may be able to borrow a personal loan to help pay the settlement.
Step 2 – Know what type of loans you’re settling
You’ll get a better deal settling federal student loans than you will with private student loans.
The company that handles collections for federal loans, Default Resolution Group, will waive the collection charges and half of the outstanding interest but none of the current principal balance. The fact that the principal is greater than what you borrowed initially — called negative amortization — is irrelevant. The federal government can afford to reject reasonable offers because it knows three things about federal student loans:
They don’t have a statute of limitations.
They are difficult to discharge in bankruptcy.
Debt collectors for federal loans can garnish your wages, take your tax refund, and seize Social Security benefits without a court order.
Private lenders, banks, and online financial institutions don’t have the same benefits. Their loans do expire, they are easier to get rid of in bankruptcy, and they must sue you before taking money from your paycheck or bank account or putting a lien on your home.
A private student loan settlement can save you a lot of money. The amount you save will differ greatly depending on the lender. Some companies will accept as little as 35% of the current loan balance. Others demand a lump sum of up to 75%.
If you’re not sure what type of loans you have, check studentaid.gov. Any loan listed on the Federal Student Aid website is a federal student loan. If your loan isn’t listed there, it’s likely a private student loan.
Learn More: How to Find a Student Loan Debt Settlement Lawyer
* A while back, the U.S. Department of Education published a manual with guidance on the settlements, or what it called compromises, collection agencies could accept from federal student loan borrowers. IMO, that manual is no longer relevant. The only offer the department has been willing to accept for its debts — no matter the financial hardship — is the Standard Compromise, which is a waiver of the collection fees and some of the unpaid, noncapitalized interest.
Step 3 – Contact the collection agency
Ask the representative for the repayment options on your defaulted loan. If they don’t offer you a settlement, ask if settlement is an option and, if so, how much they will accept. At this point, the representative may ask you about your personal finances, marital status, etc. Try to avoid giving too much detail until you get an offer. Once you get an offer, you can either accept it or counter it.
Here’s a tip: If you’re unsure how to get a settlement offer, summarize your loan history, personal struggles, and current financial situation, and ask, “Given my situation, what can we do to resolve this debt as soon as possible?”
There are three types of settlement offers student loan creditors accept:
Lump sum settlement – you make one large payment to settle the outstanding balance for less than what’s owed. You usually get the biggest discount with this type of settlement agreement.
Monthly payment – you agree to make payments over several months up to a handful of years. If you miss a payment, the offer is canceled, and you owe the full loan amount minus any payments you’ve made.
Lump sum plus monthly payment – you make an initial lump sum payment and installment payments until the reduced balance is paid in full.
Most federal student loan settlements are for a lump sum because you must usually pay it in three months or less. Private student loan debt settlements typically offer more flexible terms. Your deal will depend on the lender, collection agency, loan age, balance, and other factors.
Step 4 – Review the offer
If you can reach an agreement, make sure you get the offer in writing. An email is fine. A letter is better. When you get the offer, review it to make sure:
the loan ID numbers are listed
your name and contact information are correct
the settlement payment plan terms are listed (lump sum, monthly payment, payment date, etc.)
Step 5 – Pay the settlement
Submit payment by following the payment instructions outlined in the offer letter. Typically, you can pay using a check, money order, debit card, wire transfer, or by setting up an auto draft. Many lenders won’t accept credit card payments, so you won’t be able to rack up points at the same time.