You can settle student loan debt for less than you owe. To do so, you must first be in default on your federal or private student loan. After you default, your loan will be sent to collections. Once your loan is in collections, you should be able to negotiate a settlement for a lot less than your current loan balance.
Can You Settle Student Loan Debt?
Settlement is an option for both.
It's Possible to Settle Student Loan Debt For Less Than You Owe
It's possible to settle student loan debt for less than you owe.
Federal student loan settlement options suck.
The Department of Education typically won't accept less than 85-90% of the principal balance and accrued interest less collection fees.
Click here to read: How to Negotiate a Federal Student Loan Settlement [Sample Letter Included]
Private student loans, on the other hand, typically offer pretty reasonable settlements.
In my experience, a reasonable settlement offer to expect with many lenders is somewhere around 40-60% of the loan amount.
Reasonable is relative though. Other lenders, like SoFi, settle for around 50-80% of the balance owed.
That said, I've been able to negotiate offers for less than 30% of the balance owed.
Not Like Credit Cards
Credit card debt is usually sold from debt collector to debt collector. Student loans typically don't work like that.
Sure, the servicer may change several times. But not the loan holder.
The loan holder will almost always be the federal government or the same private lender or two. Because of that, settling credit card debt for 10-15% of the balance is common. That doesn't happen with student loan debt. Pennies on the dollar in student loan terms is more like 30-40% of the loan amount.
But usually, that's because the student loan borrower is significantly disabled or hasn't paid in years.
7 Tips for Settling Private Student Loans for less than you owe
#1 Know Your Money
The first thing I do with clients is to go over their financial situation.
Typically, a lump sum payment gets you a better settlement amount.
Because of that, it's important to know how much money you can quickly put your hands on.
So before you start settlement negotiations look at your paycheck, checking and savings accounts, 401k, available credit card balance, etc. Figure out exactly how much you have available in a lump sum. Write that amount down and keep it to yourself.
#2 Talk With Your Cosigner
Negotiating settlements for private student loans affects you and your cosigner.
So before you start the settlement process, talk with your cosigner.
They'll have questions about what settlement means for them:
- Will it affect their credit score? (Yes.)
- Can they get removed as a cosigner before you settle? (Likely not.)
- Can you refinance the loans in your name? (Maybe depending on your credit score and loan balance)
I've found that it's helpful to explain the difficulties you have in making the payments, the lack of flexible repayment plans, the accruing interest, why deferments and forbearances only delay the inevitable, etc.
You want them to know that you've done the math and you believe that negotiating a settlement is in the best interest for both you.
Who knows? They may even be willing to help you out with coming up with a lump sum.?
#3 Understand Settlement options
Settlements for private student debt will either be for a lump sum, monthly payments, or a combination of the two.
As I mentioned before, you'll typically get a better offer if you're paying it in a lump sum.
But depending on your loan balance and your financial situation, that might not be an option.
In that case, you'll want to ask for monthly payments.
I've routinely been able to negotiate monthly payments over 12-24 months at 0% interest. Sometimes, I've gotten them to agree to loan payments over 36 months. And every now and again, I've negotiated payments over 48-60 months.
In my opinion, plan for no more than 24 months. If you can get more, consider it a blessing.?
#4 Stop Making Payments for 6 Months
You can't negotiate a settlement for a student loan that's in good standing. To settle student loan debt, you have to stop making payments for several months.
In my experience, it takes about 6 months of missed monthly payments before settlement options first become available.
Those early settlement offers will likely be for 75% of the loan balance.
It will likely take 3 to 6 more months to get an offer for around 40 to 60% of the loan balance.
Why You Can't Settle a Student Loan in Good Standing
Your student loan account is owned by an investor. That investor makes a profit if you pay back your loan as agreed. So if you're paying your loans as agreed, why would they want to offer you a discount to pay them significantly less than they would earn over the life of the loan?
Keep in mind, during those months you're not making payments, your credit score is going to take a hit because of the missed payments. Your loan servicer will report those late payments to the credit bureaus.
Your cosigner's credit score will also take a hit. (This is why you should speak with them before you do anything.)
Having said that, my clients have told me that the hit to your credit score will likely be short-lived.
Many of them told me their credit scores increased soon after the student loan settlement was finalized.
#5 It's Not Personal
Steel your mind.
You're going to get a lot of aggressive letters and uncomfortable, borderline harassing, phone calls from your loan servicer and later, debt collectors.
They have a job to do: get the full amount of the loan from you.
Because they can't automatically garnish your wages or take your income tax return or social security like defaulted federal student loans, private loans have to scare you into paying them.
Don't take their efforts personally.
Keep your mind focused on the end goal: an awesome settlement offer.
#6 Say Less
Throughout the debt settlement process, your loan servicer or debt collector will do all they can to find out about your finances.
They'll pull your credit report to see what other debts you have (mortgage, car loan, credit card debt, etc.) and whether you're paying those debts.
They'll also question you and your cosigner about how much money you have available to put towards the student loan debt.
Get on The Same Page With Your Cosigner
Again, this is another reason why you want to be on the same page with your cosigner. I've seen too many instances where the cosigner says they can pay 70, 80% of the loan balance in a lump sum. When the collection agency knows that, I found it difficult – but not impossible – to get a lower settlement offer.
There's no requirement that you have to tell them how much money you have access to. They only know what you tell them. They can't go check your bank accounts or how much money you have in a sock drawer.
So stay quiet and wait for better settlement options.
#7 Get it in Writing
When you get a settlement offer you want to accept, ask the loan servicer or debt collector to send it to you in writing.
Ideally, once you get the settlement letter, you want to take it to a student loan lawyer to review it. While not necessary, hiring a lawyer to review the settlement offer is insurance to reduce the chances you'll get screwed over.
Here are a few of the things I check the settlement offer for:
- account number
- loan balance
- loans included in the offer
- payment date
- payment terms
- payment in full language
The Bottom Line
You can settle a private student loan for about 40-60% less than you owe. Sometimes you can get a lower amount, but usually, that's because it's been years since you made your last payment and the statute of limitations is near or has already ran.
Before starting settlement negotiations know your finances, talk with your cosigner, and prepare yourself for the hit to your credit report and to your psyche.
And if you need some help, let's talk.