Can You Settle Federal Student Loans? Yes, Here’s How

#1 Student loan lawyer

Updated on May 8, 2024

You can settle federal student loans, but there are a few reasons it’s not always the best choice:

  1. You Have to Fall Behind First: To settle, your loans need to be ‘in default.’ That’s when you’ve missed 9 monthly payments in a row. If you do this on purpose to settle, it can hurt your credit score by adding missed payments and a default status to your credit history. This will make borrowing money for a house, car, and so on harder and more expensive.

  2. Big Payment Required: You have to pay a big chunk of money all at once, not little by little. And you need to do this within three months, which can be tough.

  3. Savings Aren’t Guaranteed: You might not save as much money as you think. The federal government might let some of the collection fees and interest slide, but you’ll still owe the main amount you borrowed.

Ahead, we’ll explain more about how to settle federal student loans. And if you need advice on dealing with federal and private student loans, check out our tips on ‘How to Negotiate a Student Loan Payoff.’

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Understanding ‘Default’ on Federal Student Loans

When we say your federal student loans are in ‘Default,’ it’s more serious than being late. Here’s what it entails:

  • No Longer in Good Standing: Your loan status is beyond being overdue or ‘delinquent.’ It means you’ve missed nine consecutive monthly payments.

  • Not in Deferment or Forbearance: It’s not a case in which your payments are on hold. ‘Default’ means you haven’t made arrangements like deferment or forbearance to pause payments.

  • Transferred from Servicers to Collections: Your loans have been transferred from regular servicers, such as Aidvantage, AES, EdFinancial, MOHELA, Navient, or Nelnet, to a collection agency.

  • Credit Report Consequences: Late payments and a default status will be added to your credit report, reflecting a significant lapse in fulfilling your loan obligations.

Related: Default vs Delinquent

When Does It Make Sense to Settle Your Federal Student Loans?

As a seasoned negotiator of federal student loan settlements, here’s when I’ve found it might make sense:

  • Already in Default: If your loans have already fallen into default, a settlement could be a pathway to consider.

  • High-Interest Scenarios: When your outstanding interest is significantly higher than the principal balance — like having $100k in interest on a $50k principal — a settlement might work in your favor, as the government often waives some of the interest.

  • High Income, Low Balance: A settlement could be a smarter financial move for those earning a high income with a low loan balance. Why? Because if you’re making $150k a year and owe $30k in loans, an income-driven repayment plan might saddle you with high monthly payments. It might be better to settle and close the chapter.

  • Not on Track for Forgiveness: Settling could be a good choice if you’re not in line for loan forgiveness programs due to ineligibility or because you’ll likely pay off your loans before qualifying. Long-term forgiveness programs take decades; if you have made little progress toward them, why wait?

  • Value of Personal Freedom: Sometimes, it’s not just about the numbers. The relief from clearing the debt and the mental and emotional freedom that comes with it? That’s priceless. If lifting the weight of student loans off your shoulders now is worth more to you than any potential savings later, settling could be your best move.

Settling Student Loan Debt Isn’t Always The Best Option

Settling your student loan might not always be the best idea. This is especially true now because the government under President Biden has overhauled the student loan forgiveness programs and introduced different waivers like the Public Service Waiver and the IDR Waiver.

In the last two years, the Education Department has canceled about $130 billion in loans for millions of federal student loan borrowers, even those behind on payments.

Before you contact the debt collection agency to start negotiations, first check:

  1. Other options like Income-Driven Repayment Plans.

  2. Getting out of default through the Fresh Start Program.

  3. Applying for loan consolidation.

Reducing what you owe right away is tempting, but you have to think about the future.

Three Types of Federal Student Loan Settlement Offers

When you’re looking at settling your federal student loans, think of it like picking a route on a map. You have three main settlement options: the standard compromise, the discretionary compromise, and the rare nonstandard compromise.

Let’s walk through what each path might look like for you.

1. Standard Compromise

Imagine you owe $57,500 in principal (the original loan amount) and another $18,572 in interest. There might be extra collection costs, too, say $18,634. In a standard compromise, you could agree to pay $57,500 plus half of your interest, which would be $9,286. So, you’d pay $66,786.

What You Need to Know:

  • You’ve got to pay it all in one go, within 90 days.

  • The IRS might tax any part of your loan that gets forgiven.

  • You could save some cash but you’ll need to pay a large amount in a short window.

2. Discretionary Compromise

Now, let’s say you can’t manage the standard route. You might try for a discretionary compromise, where you offer less. Using the same numbers, you might say, “Hey, can I pay $50,000 instead?” You must show you’re in a tough spot financially to get this approved.

What You Need to Know:

  • It takes more work, like showing proof of your financial hardship.

  • It’s not a sure thing. The U.S. Department of Education has to say yes.

  • If they agree, you could lower your debt more, but it’s a longer, trickier road.

3. Nonstandard Compromise

This one’s like finding a secret shortcut, but it’s super rare. A debt collector might say you can settle for less than the standard amount without the Department of Education’s approval. So, if your total debt is $94,706, they might let you settle for $40,000.

What You Need to Know:

  • It rarely happens, and it’s up to the collector.

  • You could slash your debt a lot with this one.

  • The collector must cover the difference, which is why it’s rare.

You Could Ask for a Discharge Instead

If settling your loan is too costly, you might consider a discharge. This is asking the government to release you from your loan, either temporarily or for good. It’s a rare and tough path, but it’s there.

Federal student loans don’t just go away. The government can chase the debt indefinitely. But, in some tough financial cases, they may stop. It’s a personal decision that involves scrutinizing your finances.

For a discharge, you’ll need to lay all your financial cards on the table, including pay stubs, tax returns, and bank account details. It fully reveals your financial situation, letting the government assess if you cannot repay your defaulted loans.

While the option exists, discharges are rarely given. They’re reserved for dire situations where there’s little hope of financial recovery. Under 31 CFR 903.1, the government can suspend or stop collection on federal student loan debts up to $100,000, and sometimes, even above that, with the U.S. Attorney General’s consent. It’s worth considering if your financial outlook is especially bleak.

How to Settle Federal Student Loans

Here’s how to negotiate a student loan payoff for your federal loans:

  1. Find Your Loans: Go to the National Student Loan Data System on and log in. Don’t worry. Logging in won’t cause problems like restarting the statute of limitations, putting the loans back on your credit report, or getting calls from collection agencies. You’re checking to see where your loans are and who handles them.

  2. Call the Collection Agency: If your loans are held by the Education Department, you need to call the Default Resolution Group at 800-621-3115 to start talking about a deal. They will ask for your Social Security Number and birth date. Then, they’ll go over your repayment options.

  3. Ask for a Lower Amount: When you try to settle federal student loans, there’s not a lot of room to argue for a lower amount. The person you talk to will first see if you can pay the whole amount. Then, they’ll offer a settlement amount. You can counter that offer. But I have not seen them accept a lower amount in the past few years.

  4. Pay What You Owe: The government doesn’t let you pay off your settlement in small amounts. You can pay it all at once or in a few big installments, but you have to finish paying within 90 days. You can write a check or pay online at with a debit card. But unlike with private student loan settlements, you can’t use a credit card to pay the settlement.

What You Should Watch Out For When Settling Student Loans

Here are three things I ask my clients to consider before settling their federal student loans.

1. What You Might Give Up

Let’s say you have a big chunk of cash, like $50,000. If you use it to settle your loans, that’s $50,000 you can’t use for other things, like:

  • Investing: Making more money from the money you already have.

  • Saving Up: For anything big, you might need later on, like college or a house.

  • Emergencies: Surprise expenses, like if your car breaks down or you get a big medical bill.

This is called an opportunity cost because it’s about what you could have done with that money instead.

2. Taxes on Forgiven Debt

Here’s something tricky: If you settle and don’t have to pay back part of your loan, the IRS might say that amount is income. So, if you don’t have to pay back $40,000, you might have to pay taxes on it as if you earned that money working.

3. Your Future Money Moves

Settling might hurt your chances when you want to borrow money later, like when you want to buy a house or a car. Why? Because settling means you didn’t pay back all you owed. And that mark will stay on your credit report wih the major bureuas. So banks might think twice about lending you money or charge you more interest. And this can stick with you for up to seven years.

Where to Find Help

Want to get a good deal on your student loan settlement? Having an expert on your team can make a huge difference.

Think of a federal student loan settlement lawyer as your personal financial coach. They’re there to take the stress off your shoulders and ensure you get the best outcome. With their deep understanding of student loan laws and years of hands-on experience, these lawyers know all the ins and outs of dealing with the government and private student loan lenders.

A seasoned lawyer will look over your settlement agreement and can tell if it’s the lowest you can go. They’re also there to help you figure out if fixing your loan situation in another way—or even considering bankruptcy—is the right move for you.

Don’t forget about financial planners and accountants, either. They’re the ones who will help you see the big picture. They’ll break down how settling could affect your taxes and ensure that whatever you do fits your future financial goals.

Bottom Line

Understanding if you should settle federal student loans can be tricky. It’s super important to make choices that are good for your personal finances in the end.

If you’re not sure what to do or need some help figuring things out, book a call with us. We’re here to help you look at your choices and find the best way to handle your student loans. You’re not alone in this – we’re ready to help you every step of the way.

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Can Navient Negotiate a Federal Student Loan Settlement?

Yes, Navient can negotiate a federal student loan settlement for the debts it owns. Those loans are made under the Federal Family Education Loan Program and are owned by Navient. To settle, you must stop making student loan payments and default. Once that happens, settlement will likely become an option.

Can You Negotiate a Settlement For a Federal Student Loan With a Court Judgment?

Yes, you can negotiate a settlement for a federal student loan with a court judgment. To negotiate, you must find your current loan holder. Usually, that’s the Department of Justice in the federal court where you were sued.

How to Negotiate Perkins Student Loan Debt Settlements?

To negotiate a settlement for a Perkins Loan, you’ll need to contact the school you borrowed the loans from or the loan servicer they hired to manage collections. They may accept less than you owe for a lump-sum payment.

What Happens If I Never Pay Federal Student Loans?

For the next year, the Education Department will pause collection activity for federal student loans. But after that, they’ll start back with wage garnishments, tax refund seizure, and Social Security benefit offset. Before that happens, contact your student loan servicer to set up a payment plan.

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