#1 Student Loan Lawyer
Updated on March 9, 2023
You can settle private student loans for less than you owe — no matter what you’ve been told.
But the process of getting a settlement offer will wreck your credit score temporarily and may force you to put down a bundle of cash shortly after you get a deal.
Over the past decade, I’ve negotiated dozens of private student loan settlements with many lenders, banks, credit unions, debt collectors, and so on. During that time, I’ve yet to come across a company that refuses to negotiate.
Despite my success, I caution borrowers that settling private student loans isn’t a decision to take lightly. Collection agencies will hound you, your family, friends, and job to pressure you into making payment arrangements. Late payments will be added to your credit history with the major credit bureaus. Collection costs may be added to your balance. And you and your cosigner could face wage garnishment, bank account withdrawals, or even liens being put on your homes.
Considering those consequences, take care to review your financial situation and options before settling private student loans.
Related: Can You Settle Federal Student Loans?
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.
Settlement becomes an option after you fall behind on student loan payments
Private student loan debt settlement is like going to battle against your lender. You’re negotiating with them to pay off your loan balance for less than what you owe. But this fight only starts when you’ve missed several monthly payments and your loan has been charged off. There is no discount for paying student loans early. That doesn’t come until the debt collection agency steps in to collect what’s owed.
Related: How to Get Student Loans Out of Collections
It’s a bitter pill to swallow, but settling a student loan that’s in good standing is a non-starter. Even if you call your loan servicer or private lender and offer to make a lump sum payment for the original amount you borrowed, it won’t fly.
A settlement only becomes a possibility after the student loan defaults.
This is a hard truth that many people struggle to come to terms with. They’ve made their student loan payments like clockwork and applied for deferments and forbearances when they needed a break. That they now need to miss payments to obtain debt relief is counterintuitive and frightening. They worry that their wages, Social Security benefits, and savings will be at risk of garnishment. Furthermore, they believe their credit score will be permanently damaged, making it impossible to buy a home, get an auto loan, or even apply for new credit cards.
It’s a hard reality, but that’s the nature of the beast when it comes to settling private student loans.
How to settle private student loans
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
How much a private student loan settlement could save you
Private student loan debt settlement amounts vary depending on the lender, the age of the loan, your credit score, whether there’s a cosigner, etc. Many lenders won’t accept less than 70% of the total owed, but others, like FAMS, typically take up to 10% of the balance.
Related: FAMS Student Loan Settlements
Some people see these settlement ranges, get excited and want to do the same for their federal student loans.
Unfortunately, savings aren’t nearly as big for those.
The Education Department typically won’t accept less than 100% of the current principal and half of the outstanding interest. This is because there’s no statute of limitations for federal student loans, meaning that the department has virtually unlimited time to collect on the debt, and they have powerful tools at their disposal, including the ability to garnish your paycheck and Social Security payments.
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.
Why it’s possible to settle private student loans
Private lenders are typically willing to settle because they have significantly fewer collection powers than the federal government has for its loans. The U.S. Department of Education can garnish your wages, take your tax refund, and snatch your Social Security benefits after you default on federal student loans. And they can do all those things without taking you to court.
In contrast, private lenders like Navient, Sallie Mae, and SoFi must take you to court and get a signed order from a judge before they can do those things.
Related: Settling Student Loan Debt With Navient
Because of this added hassle, many lenders will cut their losses and accept less than they’re owed.
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.
Options if you can’t settle private student loan debt
Look to refinance
If you’re struggling to make your payments, student loan refinancing can help. Refinancing a student loan swaps your current debt for a new loan, ideally with a lower interest rate and longer repayment term. Your eligibility for the best rates and terms will depend on your credit score and other factors like your income and employment history.
Related: How to Consolidate Sallie Mae Loans
By refinancing, you could potentially lower your monthly payments and the total interest you’ll pay over the life of the loan. This can be especially beneficial if you have high-interest private student loans. Use an online marketplace like Credible to compare rates with multiple lenders simultaneously.
But what if you’ve already defaulted on your private student loans?
Refinancing might seem like an unattainable dream. But fear not. There’s still hope. Yrefy is a company that specializes in refinancing defaulted private student loans. They’re the only company in the industry that’s willing to help borrowers in this situation.
Consider filing bankruptcy
Filing for student loan bankruptcy might not seem like an ideal solution, but it could be a lifeline for those struggling with private student loans. While refinancing may not always be an option, bankruptcy can provide a way to settle debts while still living a full life that includes getting married, having kids, or buying a home.
I’ve used this option for many clients, and it has proven successful in providing a settlement agreement that is realistic and affordable. For example, a single mother in Texas settled a $112,000 private student loan for $40,000 over 10 years at 0%, dramatically reducing her monthly payments from more than her mortgage to just $300 per month.
Another client, a teacher in Missouri, settled $430,000 in private student loan debt for $86,000 over 20 years at 1% interest, a deal that made a significant difference in her financial situation. These results are not uncommon.
In fact, private student loans are often easier to deal with in bankruptcy than federal student loans since private lenders rarely offer flexible student loan repayment options like income-driven repayment plans or student loan forgiveness programs like Public Service Loan Forgiveness.
While filing for bankruptcy may seem like a scary prospect, it’s important to remember that the financial hit only lasts about two years, and it’s often a shorter time frame than struggling with private student loans that may never be paid off.
Settling private student loans is a tricky business, and there are many obstacles along the way that can trip you up and keep you from achieving a successful settlement.
With so much money on the line, it’s crucial to seek legal advice and enlist the help of someone with a proven track record in negotiating private student loan settlements. If you’re ready to explore your settlement options and find the best way to escape your private student loan debt without causing significant damage to your credit or that of your cosigner, schedule a call with me today. Together, we can tackle this challenge and help you regain control of your financial future.