Lump Sum Student Loan Payoff — Pros and Cons

#1 Student loan lawyer

Updated on November 2, 2022

Any student loan borrower can pay a lump sum repayment to significantly reduce their overall student loan balance or even pay it off. There should not be any penalties for paying off your student loans early.

You may also be able to negotiate a lump sum settlement to pay off your student debt at a reduced amount — though this usually requires tanking your credit score first.

A lump sum is simply a large amount of money paid at one time. A lump sum settlement is when you negotiate with a loan holder (usually private, not federal) to pay off your entire debt at a reduced overall cost.

This is a guide that will help you learn all you need to know about typical lump sum payments, as well as rarer (but more exciting) lump-sum settlements.

How do you pay off a student loan?

You can pay off a student loan by making one lump sum payment that takes care of your total loan balance. You should easily be able to find the lump sum amount on your loan servicer’s website.

My advice: only do this if your savings account is strong and you don’t have other, higher-interest payments such as credit card debt or a personal loan. Also, if you’re on track to obtain Public Service Loan Forgiveness or other student loan forgiveness, it might be better to wait.

Alternatively, you may be able to negotiate a lump sum settlement for less than the total amount owed.

Who is eligible for a lump sum payoff?

Anyone with a student loan is eligible to voluntarily pay a lump sum payoff to get rid of a chunk of their student debt — or eliminate it altogether! There should never be a penalty for paying off your student loans early with a voluntary lump sum payoff.

Can you negotiate a payoff on a student loan? Yes, you can negotiate a payoff on your student loan in certain circumstances, sometimes called a student loan settlement.

To be eligible for a lump sum settlement, where you pay less than the total amount to get rid of the debt, you must first default on your student loans. This will negatively impact your credit. Only then can you (politely) ask to negotiate a settlement.

(Defaulting means a certain amount of time designated in your promissory note has passed where you haven’t paid a monthly student loan payment.)

Defaulted federal loans — namely Direct Loans, FFEL, and Perkins Loans —  are possible to settle after 270 days in default. However, due to the many options available to the government for collecting on defaulted loans, they won’t accept offers below 85% of the loan balance.

On the other hand, private lenders are often more likely to settle. The option is typically available after 4 months, or even less, in default. These private student loan lenders will often settle for a lower percentage of the balance than a federal loan.

A private lender may negotiate a lump sum settlement with you if:

  • You can prove you have few assets and little income

  • You are represented by an expert, like a student loan lawyer

Does the student loan payoff amount include interest? No, a student loan payoff does not include future interest. However, a student loan payoff will include past interest that’s already accrued.

Lump sum to decrease student loan debt

You may want to pay a lump sum to decrease your overall debt, even if you can’t pay the student loan off completely. This is a great option, and I would recommend doing this if possible.

Depending on your student loan interest rate and repayment plan, some experts recommend choosing to pay off chunks of your student loans instead of investing in the stock market.

Since your student debt constantly accrues so much interest, a partial lump sum payment can save you hundreds — even thousands — of dollars in extra payments down the line.

Lump sums and student loan settlements

You can negotiate a student loan settlement where you only have to pay a percentage of the total loan balance in a lump sum payment, then you’re free of the debt forever!

Sound too good to be true? That’s because it’s not always possible. However, hiring a student loan attorney can maximize your chances of success.

Check out my article on student loan refinancing to see if you should refinance your loans for a lower interest rate instead of trying to settle. I recommend SoFi or CommonBond for refinancing options.

Lump sums for private student loans

If you’ve defaulted on your private student loans, you may be able to negotiate a settlement to pay off your private student debt with a lump sum payment. These payments usually equal less than the total balance.

If you can prove you have little to no income and few to zero assets, private loan companies — and the collection agencies that may buy up that debt — are usually inclined to take a lump sum settlement. This is especially true if their other option is to receive nothing from you.

You typically get a much better deal than with federal student loan settlements. Private student loans often settle for between 40% and 70% of the current total loan balance.

To maximize your chances, I recommend that you hire a student loan lawyer. Of course, I’m biased. But I’ve also seen what I can do for struggling Americans like you.

Lump sums for federal student loans

Federal student loan settlements are rarer and often more expensive. The Department of Education has many ways to collect the full amount you owe.

Some of the options include wage garnishment and tax refund offset from your income tax returns. These methods allow the federal government to recoup their losses from your unpaid student loans.

However, it’s often possible to negotiate a settlement to pay off federal student loans with a lump sum if you’re in default. The three most common scenarios include:

  1. If you can prove you can’t afford to repay the loan in full.

  2. If you’ve moved out of the country.

  3. If you hold no gainful employment.

Federal student loan holders almost never accept settlements for less than 85% of the outstanding principal balance and interest balance. This doesn’t save you a ton of money, but it does avoid years of further interest accruing.

Benefits of a lump sum settlement

Many positive possibilities can come with a lump sum settlement, both financially and for your mental health.

The benefits of a lump sum settlement can:

  • Reduce the lifetime amount you have to pay

  • Reduce the loan term to zero

  • Cost less than your current loan balance

  • Eliminate future interest from accruing

  • Free up your monthly budget

  • Improve your credit score in the long term by getting rid of missed monthly payments (you may have to wait 7 years before your credit report recovers)

  • Remove an incredible burden from your shoulders

Drawbacks of a lump sum settlement

However, a lump sum student loan payoff is not a get out of jail free card. Remember, there are drawbacks to lump sum settlements unless you’ve done some serious planning.

Some cons of a lump sum settlement include:

  • Draining your bank account or emergency fund

  • The potential for more debt if you take out a loan to pay it off

  • Hurting your credit history and status in the short-term

One more note: Due to the relative interest rates, a lump sum settlement typically should not come before paying off credit card debt.

How to make a lump sum payment

You can make a lump sum payment to eliminate your student loan debt or knock out a sizable chunk. Here are the simple steps involved:

  1. On your loan service provider’s website, find the total payment amount needed to pay off the student loan altogether. You can also contact them via phone. If you can’t afford the total amount, consider paying a lump sum to greatly reduce your overall balance.

  2. Either way, pay that amount via your loan servicer’s website, over the phone, or by mail. If over the phone or by mail, you may need to give additional instructions as to which loan you’re paying that lump sum towards.

  3. Feel your shoulders get lighter.

How do you calculate the payoff amount on a student loan? You can calculate the payoff amount on a student loan by visiting your loan servicer’s website or calling your loan holder. Lump sum payoff information should be readily available.

What are the benefits of paying off student loans in one lump sum? Paying off student loans in one lump sum:

  • Reduces the amount you have to pay during the life of the loan

  • Lowers the student loan repayment term

  • Eliminates future interest from accruing

  • Frees up your monthly budget

  • Is sometimes financially wiser than investing, depending on interest rates

  • Removes a considerable burden from your life

If you have the money and the ability, a lump sum student loan payoff can be life-changing.

Other options for student loans

If you don’t have the funds for a settlement and you’re not sure you can afford your student loans, you’ve got other avenues available to you.

Your options for dealing with student loans can include:

As you can see, you have many student loan repayment options. However, sometimes the options feel overwhelming to sort through. In fact, I started my work as a student loan lawyer to help a friend who felt confused by how to get out of student loan debt.

Not sure about a lump sum payment? Let’s talk.

Whether you’re making a voluntary lump sum payment to pay off your student debt, or you’re negotiating a student loan settlement, you likely have questions. Fortunately, I’m an expert, and I love to help people like you.

Schedule a call with me to see if we’re the right fit for one another. You might be surprised at how much I can do for you.

Share On Social

Stop Stressing