Settling private student loans isn’t guaranteed. Your lender could refuse to accept less than they’re legally owed. But in the decade that I’ve spent helping student loan borrowers settle their private loans, it’s been my experience that lenders are usually willing to accept a fair settlement amount for defaulted loans.
But there’s a catch — your loans must be in default before starting settlement negotiations. Often, a private student loan is considered to be in default after 180 straight days of missed payments, after which the loans will be sent to collections, and settlement options become available.
Here’s a step-by-step guide to help you settle your private student loans.
Step 1: Verify the amount you owe and the date of default
Before discussing payment options or a payment plan with your loan holder or debt collector, know the exact amount you owe, whether interest is still accruing, and the date your loans were put into default, i.e., the date the statute of limitations ran.
For example, in Missouri, the statute of limitations for private student loans is 10 years. That means the lender has a decade from the date you default to legally sue you for payment. You might be able to negotiate a lower settlement amount the closer the loan gets to that end date. Keep in mind the timeframe varies depending on where you live and the terms in your promissory note.
The collection agency should send you information about your current loan balance when it first contacts you. If you didn’t get the debt validation notice, ask that it be sent to you. That way, you’ll have the information you need
Step 2: Determine how much you can pay
When trying to settle private student loans, it’s important to first review your budget to determine the amount you can realistically offer as a settlement. This amount can be paid in a lump sum or in monthly payments over a period of up to five years, which is typically the longest period lenders will accept.
In cases of financial hardship, it’s essential to gather proof of your income, such as tax returns and pay stubs and documentation of living expenses, including medical costs. While not always necessary — I’ve rarely had to provide this information for my clients — having this information can help persuade the loan holder to accept your offer.
Step 3: Negotiate with your loan holder
Settling private student loans requires careful negotiation with your lender or debt collector.
As a student loan lawyer with years of experience, I’ve found that making the first offer is often the best approach. I base my offer on my client’s ability to pay, as well as my experience with a student loan lender. For example, I may know that the last 10 settlements with a particular company resulted in deals for around 40% of the balance. I take that into account to avoid any lowball offers that would be rejected outright.
Other settlement companies may opt for a “settlement for pennies on the dollar” approach, but I find that this only slows down the process. My goal is to settle my client’s private student loans quickly so they can move on and rebuild their credit scores.
When making an offer, consider what you can realistically afford to pay as a lump sum and over time. Your lender may accept or counter your offer, and negotiations may go back and forth until a deal is finally reached.
Step 4: Follow through with the settlement agreement
The work doesn’t end when you get a written settlement offer. Now you need to stick to the agreed-upon terms and make payments on time and in full.
Double-check with your loan holder to determine the exact amount of time you’ll have to make the payment. Late payments will keep being added to your credit report until the last installment payment is made and the settlement is paid in full.
Once you make your last payment, the loan holder will send a cancellation of debt notice to the IRS.
At that point, you’ll have one more hurdle: the unpaid part of your student loan is reported as taxable income on a 1099-C.
You’ll need to include this in your tax returns and may have to pay income tax on it unless you’re considered insolvent. Be prepared for this added expense, and consult with a tax professional if needed.
Related: Debt Settlement Tax Consequences