Q: Can I negotiate my federal student loans?

Stanley Tate smiling.

Stanley tate

Student Loan Lawyer

$400M+ student loans managed

listen to this post

You can negotiate a settlement for federal student loans only if you're in default. After you default, the Department of Education is willing to settle Direct Loans and the FFEL and Perkins loans it holds. Typically, the settlement will have to be paid in 90 days and will be for about 85% of the current loan balance less collection fees.

Under current guidelines, I know of no way to settle a federal student loan for what you originally borrowed.

Can you settle federal student loan debt?

You can settle federal student loan debt — but only if you're in default. With federal loans, you're in default after 270 days of missed payments. Until you default, your loan servicer will tell you that settlement is impossible. But after you default, your loans will be sent to Default Resolution Group and then to a collection agency. Once that happens, settlement is possible.

Federal Student Loan Settlements Currently Won't Settle for Less than 85%

Around the time Secretary Betsy DeVos was installed as the Secretary, the Department of Education began refusing to accept discretionary settlements and non-standard compromises. Because of this, federal student loan settlements almost never dip below 85% of the loan balance less collection fees.

The Basics

Before we begin, I recommend getting a clear view of all your federal student loans by visiting the National Student Loan Data System at student aid.gov.

This System will let you see all the federal student loans you have. This way you’ll know exactly how many loans you have, how much you owe, and which servicer or collection agency your loans have been placed with.

(So you know, there’s no similar system to check your private student loans.)

Instead, the best way to get more information on your private student loans is to compare the loans you find on the NSLDS against your credit report.

Any student loan listed on your credit report that’s not listed on the NSLDS is likely a private student loan.

With that out the way, let’s get into how to settle a federal student loan.

Student loan offer in Compromise

First things first:

The Department of Education doesn’t settle student loans.

Instead, they compromise student loan debt.

Different word sure. But it’s effectively the same thing.

I point that difference in language out to you in case you seen student loan offer in compromise used elsewhere on the internet.

Debt Settlement Options & Guidelines

Here’s the thing with compromising (i.e., settling) a federal student loan:

You have to be in default before you can settle.

Technically, the Department of Education’s regulations say the Department can accept a compromise any time they can’t collect the full amount because:

  1. You can’t pay the full amount in a reasonable time as verified through credit reports and other financial information.
  2. The government can’t collect the debt in full through garnishments and income tax refund offsets
  3. The government’s cost to collect the debt doesn’t justify them trying to get the full amount.
  4. There’s a significant doubt the government can prove its case in court.

In practice, none of those factors matter. The only factor that matters is whether you're in default.

Delinquency isn't enough.

Being in deferment or forbearance isn't enough.

Your federal loans can't be in good standing; they have to be in default to settle a federal student loan.

Strategic student loan default

Considering a strategic default to deal with your federal student loans?

A word about that: don't.

It's not worth strategically defaulting on your federal student loans.

​First, you have to miss 9 monthly student loan payments before you can get a settlement.

Second, under the current settlement process, you'll typically only save somewhere between 10-15% of the current balance.

There's no way to negotiate a settlement for what you originally borrowed.

Finally, the government won't offer you more than 90 days to pay the settlement amount.

Instead of strategically defaulting, you're better off getting into one of the income-driven repayment plans like income-based repayment. At least that way you can pursue student loan forgiveness.

I suggest that path because, again, federal student loan debt settlement offers suck.

They're really expensive.

Settling Smaller Balances

If you have a smaller loan balance, you’d want to stress to the collection agency they should accept a lesser amount because the administrative and litigation costs are costly in relation to the amount owed.

Financial Statements Usually Aren't Necessary

You’re supposed to submit a financial statement you’ve executed under penalty of perjury showing your assets, liabilities, income, and expenses. But, in practice, that’s not always true.

Federal Student Loans Don’t Settle For Pennies on the Dollar

If you’re thinking of settling your federal student loans for pennies, forget about it.

The federal government, unlike private lenders, usually doesn’t accept settlement offers for pennies on the dollar. They don't have to. Not when there's not statute of limitations for federal student loans. And especially not when they can garnish your wages, offset your tax refund and social security benefits.

The type of settlement agreements they accept instead are:

  1. Standard compromises,
  2. Discretionary compromises, and
  3. Nonstandard compromises.

These settlement options come from a 2009 manual the U.S. Department of Education issued to its private collection agencies. That manual is no longer public information. So no one is really sure of the federal student loan settlement guidelines.

(Nonstandard compromises haven't been accepted since 2017. More on that below.)

A standard compromise requires you pay either:

  • the current principal and unpaid interest (they grant a waiver of your collection costs);
  • the current principal and half the interest (collection charges are waived); or
  • 90% of the current principal and interest

Discretionary Compromise

A discretionary compromise is where you offer less than one of the standard compromise options. With a discretionary compromise, you’ll submit a settlement letter with a specific offer and reasons why your offer is below the standard guidelines.

For instance, if your reason is that you have a financial hardship you’ll want to provide financial documents such as your pay stubs, W-2S, last 2 tax returns, etc.

Lastly, the Department of Education has to give prior approval of a discretionary compromise before the private collection agency can accept it. It’s been said the Department is more willing to approve a student loan borrower’s discretionary compromise where they’re unable to use wage garnishments or offset Social Security benefits or tax refunds.

It can take anywhere from 30 to 60 to 120 days to get a response to your discretionary compromise offer.

Non-standard compromise

A non-standard compromise is an offer that the private collection agency offers without the Department of Education’s prior approval.

There’s a limit on how many non-standard compromises a collection agency can offer each quarter.

Collection agencies are hesitant to offer non-standard compromises because of how they affect their bottom line. The agency has to pay out of its own commission the difference between what the federal government could’ve gotten under a standard compromise and what was accepted under the non-standard compromise.

Be careful about accepting non-standard compromises.

They may not be binding on the Department of Education.

Before paying the compromise amount, you want to get the Department of Education’s approval. That way you know you’re done.

FYI. Under former Secretary Betsy DeVos's administration, nonstandard compromises for defaulted loans weren't accepted. Since she's left office, that position, to my knowledge, has not changed. I will update this if I learn that it has changed and the Department is willing to again accepted non-standard compromises.

What Happens After the Settlement Offer is Accepted

After the settlement offer/compromise offer has been accepted, you should get a formal letter from the collection agency stating offering the compromise.

The letter from the debt collector should include:

  • your name
  • account number
  • agreed upon compromise amount; and
  • the deadline by which the payment must be made.

For student loans that are owned directly by the Department of Education, you can pay your settlement online at myeddebt.ed.gov or you can mail it to the National Payment Center in St Louis.

Monthly payments typically aren't accepted

When settling federal loans, you better have a lump sum payment.

The Department doesn’t accept monthly payments longer than 90 days.

This is why settling federal loans can be challenging.

Not only does the government typically demand settlement offers of 90% of the principal balance and interest balance, but they also want their money in 90 days or less.

You can make your payment by debit card over the phone or through a check mailed to the Department of Education’s National Payment Center. The Department no longer accepts payments made by credit card.

My clients made their payments by check.

We mailed the check, the compromise letter, and a letter with the loan number and my client’s social security number on it.

Federal student loan settlement sample letter

Federal student loan settlement letters look similar no matter which collection agency you settle with.

Sample of federal student loan settlement letter

The letter will have:

  • your name
  • your account number
  • the loans included in the settlement
  • the balance due
  • the settlement amount
  • the payment due date
  • the payment address and
  • instructions on what to write on your check, money order, etc.

Ask for a student loan paid in full letter

The final step is to request a student loan paid in full letter.

In my experience, it takes about 2 to 3 weeks for your check to clear and your account to be updated.

Once you see your account’s been updated, contact the collection agency or the Default Resolution Group to request the letter.

When you get it, the letter should list your account number and the settlement amount.

Student loan compromise won't hurt credit score

An offer in compromise for a federal student loan likely won’t drop your credit score any more than it’s already dropped.

Here’s what I mean.

The Department of Education typically will settle a student loan only after you’ve defaulted on your loan. And if you’ve defaulted on your loan, that means you have at least 9 months of late payments killing your credit score.

I doubt that a settlement of your federal student debt will further tank your score.

Having said that, I can see the case for why a settlement will hurt your credit score. First, you’re closing an aged trade line. Second, you’re paying less than agreed.

Combined, those two arguably could drop your credit score.

But how much more damage could they do compare to what’s already happened?

In my opinion, the better move is to work on building your credit after the settlement’s complete. Most of my clients who take this approach see an 80+ point increase in the year after the settlement completes.

Stop Stressing.
Get expert help
Stanley Tate outside in snow.
Hey, I’m Tate.

I'm a student loan lawyer that helps people like you with their federal and private student loans wherever they live.

Read a bit about me & how I got started with student loans.

get expert advice