Private Student Loan Debt Settlement: How It Works

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Stanley Tate

#1 Student Loan Lawyer

Updated on January 12, 2023

Private student loan companies will consider settlement offers, but the chances of getting a deal depend on the borrower’s financial situation, loan amount, and payment history, among other things.

Lenders and debt collectors commonly start settlement negotiations with someone who hit a rough patch, such as losing their job, not being able to work in a field of study, or some other financial hardship. They may offer repayment options such as reducing the interest rate, lowering monthly payments, or offering a settlement agreement for less than what’s owed.

Ahead, learn how to negotiate a private student loan settlement.

Related: Can You Negotiate a Student Loan Payoff?

Want help negotiating the best settlement offer quickly with the least damage to your credit score? Book a call with me. Over the past decade, I’ve helped hundreds of people across the United States get settlement agreements with lenders like Sallie Mae, Navient, Discover, SoFi, and others.

How to settle private student loans

You can’t just call up your loan servicer and negotiate a settlement if your account is in good standing. There’s no discount for paying off student loans early. If you’re keeping up with your payments or your loans are in deferment or forbearance, the servicer will turn down any settlement offer.

The only way to get to the bargaining table is to fall behind on your payments, let the loans go into default, and wait for them to be charged off. It’s not a pretty picture.

Related: What Happens If You Don’t Pay Private Student Loans?

Not only will the missed payments be reported to the credit bureaus and tank your credit score, but you and your cosigner will also be at risk of being sued. This can lead to wage garnishment, bank account levies, and even a lien being put on your home. It’s a risky and uncertain situation, but sometimes in life, you have to weigh the risks and decide what’s worth it.

Related: How Does Student Loan Default Affect Your Credit Score?

Step 1 – Review your finances

There are a few options on the table to settle private student loans. You can go for a lump sum payment, monthly payments, or a combination of the two.

But before you start any negotiations, you need to know your numbers.

Figure out how much you can pay upfront within the next 30 days and what you can afford each month towards the defaulted loans. That way, you’ll have a framework to know the settlement amount you can realistically pay.

Related: Does Navient Settle Student Loans?

Gather your income information

Some lenders will request recent pay stubs and tax returns to evaluate your offer.

Turn off auto pay

If you’re still making student loan payments but plan to strategically default, disconnect your checking information from your account. Read more about strategic default for private student loans.

Update your contact information

If your goal is to settle, you want to make sure your lender or the debt collection agency that gets your account can contact you. Consider setting up a VOIP phone number and virtual mailbox if part of your settlement plan is to move overseas. Read more about how to pay US student loans from overseas.

Step 2 – Make contact

Many private student loan lenders ship charged-off loans to a debt collector to handle the collection process. If you haven’t heard from them, it’s time to call. Reach out to the loan servicer or holder and discover where your loans have been moved.

Once you have that information, it’s time to get to work.

Contact the company and get your hands on:

  • The account number.

  • The identification number for each loan.

  • The loan balance, including any collection costs.

  • The last date of payment.

  • The charge-off date

You should also find out if interest is still accruing. Use these details to craft your settlement offer. Expect to pay 50-80% of the current balance for newer loans. Older loans might be 35-60% of the balance, and for loans that haven’t been paid in years and the statute of limitations is near or has passed, you might settle for pennies on the dollar.

Step 3 – Get a written offer

Hold off on paying the settlement until you get a written offer. Check the letter to ensure the ID numbers for the loans you’re settling are listed. You also want to confirm that your name and account number are correct and that the payment details are listed.

Step 4 – Rebuild your credit score

Most lenders and debt collection agencies won’t agree to remove the late payments from your credit report as part of the settlement agreement. They’ll also refuse to tell the credit bureaus you paid the account in full rather than settling it for less. Work with a credit repair professional to get the defaulted loans removed from your credit history due to inaccurate information.

Want someone to handle the settlement talks for you? You can hire a debt consolidation company or student loan debt settlement lawyer.

How much to offer

Private student loan settlement amounts vary a lot. For example, Sallie Mae and SoFi loans typically settle for no less than 60% of the balance. Meanwhile, other lenders will accept around 40% of the total owed. A few will take 5% of the balance. But usually, that’s because the statute of limitations has run out, which means they can no longer sue you and get a court order to garnish your wages or take money from your bank account.

The settlement offer you’ll make depends on:

  • The loan balance.

  • The date you last made a payment or your deferment or forbearance ended.

  • Whether your credit report shows that you’re struggling to pay your other debts.

  • Your financial situation — are you working, disabled, a single parent, etc.

  • How much can you afford, and how quickly can you pay it.

Related: Should I Pay Off My Student Loans in One Lump Sum?

What to expect after paying the settlement

A few weeks after you’ve paid the settlement in full, the lender will send you a letter to confirm the payment and that you no longer owe a balance. At the end of the year, you’ll receive a notice of debt cancellation for the difference between your loan balance and the settlement amount. The IRS will treat this amount as taxable income, which could result in you paying more in taxes.

You may be able to avoid the tax hit if you’re considered insolvent. Read more about student loan insolvency.

Where to get the money to pay the settlement

Coming up with the money to pay the settlement is challenging for many people, especially those with a high loan balance. Many lenders and debt collection agencies want to be paid in a lump sum or over a few months. Few will accept monthly payments over a longer time. Those that do won’t go past five years.

If you need help coming up with the money for the settlement, you may be able to take money out of your 401k or home equity. You may also be able to borrow a personal loan, depending on your credit score. Before you take the money, check the interest rate. It may be a lot more than the loans you’re paying off.

As for credit cards, many companies won’t accept them as payment. They usually only accept personal checks, ACH payments, or wire transfers. Having said that, it’s possible to use a cash advance to pay the settlement. But the fees and interest you’ll pay for the advance may wipe out the benefit of using the card.

Another option is to structure your deal to mix monthly payments with larger one-off payments. This deal makes sense if you expect a tax refund, bonus, annuity, etc.

When you can’t afford the settlement amount

If you’re in a tough spot — owing a large sum and barely scraping by, with no savings and no one to turn to for help for a lump sum payment — you might be out of luck when it comes to settling with your lender.

When it comes to options, you’re looking at a bleak picture.

You could wait it out until the statute of limitations runs out on your debt, but that just means months or years of late payments piling up on your credit report. You could file for bankruptcy, but that’s a big hit to your credit score that’ll haunt you for a decade, making it tough to get new credit cards or financing for a home or car loan.

Neither is a great choice. But, in life, you play the hand you’re dealt. And in this case, you have to weigh the pros and cons and decide which is the lesser of two evils.

Alternatives to settling private student loans

Student loan settlements are often the last resort for borrowers. They’ve tried everything to make their student loan payments. They’ve asked for a lower interest rate and more affordable payment plans. They’ve tried to refinance, but their credit score ruined their eligibility. They even looked into different student loan forgiveness programs. But those benefits are only available to federal student loan borrowers.

If you cannot settle and student loan refinancing isn’t an option, then the only way to get any debt relief may be to file bankruptcy.

Keep in mind that bankruptcy alone won’t get rid of your loans, but it could wipe out your entire balance if you prove that paying the loans will cause undue hardship. That’s easier to prove for private loans than for loans owed to the federal government since, unlike the U.S. Department of Education, private lenders don’t offer flexible student loan repayment options like income-driven repayment plans or loan forgiveness programs like Public Service Loan Forgiveness.

Related: Can You File Bankruptcy on Private Student Loans?

Bottom Line

When it comes to private student loans and settlements, it’s a tricky game. Private lenders aren’t known for their flexibility. But here’s the thing: it’s not impossible.

Book a call with me if you want help evaluating your settlement options. I’ve helped hundreds of borrowers settle loans with many creditors. That experience helped me figure out the difference between a good and a great offer.

UP NEXT: Does Settling Student Loan Debt Hurt Your Credit?

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