Student Loan Settlement - Is It A Good Choice?
Borrowers who’ve defaulted on their federal or private student loans can settle them for less than what they owe.
Those with the ability can either pay a lump sum to clear their debt whereas borrowers who are unable to pay a cash amount can receive a modified payment plan.
Settlement for a student loan is possible, but the settlement completely depends on the lender’s willingness to accept less than you owe, and there’s no guarantee they’ll agree
How To Go About It
A settlement is possible only if the loan is near or already in default. As per the Consumer Financial Protection Bureau, it takes 270 days for a federal loan to enter default.
For private loans, timelines are different, but mostly default happens after 120 days of missed payments.
If the loan isn’t in default or if you can pay the complete debt, then you’re not eligible to settle the debt.
This outcome is quite different from a type of student loan forgiveness settlement whereby the loan balance is waived under certain circumstances.
The defaulted federal loan can be discharged in certain instances but these loans cannot be forgiven.
When a debt is settled, the lender should ideally agree to receiving a lesser amount than the original amount borrowed.
Federal Loan Settlement Vs Private Loan Settlement
Settling a federal student loan isn’t common, as the Department of Education and other federal loan holders have many ways to get money from defaulted loans.
Federal student loan offer the payment options detailed below to settle debts:
- Pay the current principal balance and all the surcharges and fees are waived off.
- Pay the total principal and half of the interest balance, the other 50% is forgiven.
- Pay 90% of the total principal, and the remaining 10% is discounted.
Settling private loans is more common given the lenders don’t have the collection leverage of their federal counterparts.
The lender can accept a settled amount in the circumstances highlighted below:
- The borrower has little income or assets
- Legal defense is stronger
How Much Could You Actually Save?
If it’s a private student loan, the total amount you can save varies between lenders.
Some can agree to accept even 50% and some can be reluctant to accept less than 80% of the amount owed.
For federal loans, a specific set of guidelines is provided by the Department of Education with all the terms and conditions regarding the debt.
Some of the settlement options are:
- 100% of the collection cost is waived.
- 50% of the interest owed is waived.
- 10% of the principal and interest are waived.
If you have a loan that falls under the Federal Education Loan Program, the organizations that take the responsibility for loans in default can provide you with an option that can save 30% of the principal and interest.
Keep in mind that the unpaid amount is taxable.
The Options
A student loan can be settled either on your own or with the help of an experienced negotiator.
Once you and the loan holder agree to settle the debts, get all the documents in writing and a receipt of a paid-in-full amount.
Do It Yourself
Contact the servicer who’s in charge of handling the defaulted loan.
They’ll act as a collection agency for defaulted loans.
Contact these agencies directly and discuss all the options.
Hire An Attorney
Choose an attorney who’s adept at handling student loans, including the repayment of such loans.
Be absolutely sure to choose someone who specializes in this.
Note that you’ll have to pay legal fees and the lawyers won’t be able to give a guarantee in terms of outcomes.
Attorneys can negotiate federal loan settlements but are most useful if you have been sued by your private loan lender.
Use A Debt Settlement Company
If you’re still making the payments, you’ll be stopped from doing so if you enlist a debt settlement company.
If your loan isn’t in default, don’t choose this route as this can be risky.
Many lenders don’t agree to negotiate with these debt relief companies.
Before selecting this option, be sure to confirm with your lender.
Bottom Line
Make sure to get the agreement in written form before selecting any payment plan.
Review all the terms and conditions outlined in the agreement and ensure that it settles all the debts that you need handling.
After you pay the complete agreed-upon amount, get a paid-in-full statement issued by the lender.
Don’t forget to explore all the available options to relieve student loan debt to uncover the most favorable strategy.
