For example, let’s say you currently owe $5,000 in principal, $2,000 in interest, and $1,000 in collection costs and fees, for a total of $8,000. Here is what you would pay under each standard settlement type:
Private Student Loan Settlements
Private loans are issued by banks and online lenders instead of the government, so they don’t have as standardized regulations as federal loans.
Federal student loan settlements are governed by federal guidelines and regulations, which place limits and constraints on those settlements, says Minsky. Private student loans generally have more flexibility, but this can vary significantly depending on the specific lender involved.
There is no typical percentage amount, as student loan settlements can vary wildly depending on the type of student loan, the lender, the borrower’s mitigating factors, and whether the borrower has any viable legal defenses or disputes, says Minsky.
How to Negotiate Student Loans
To start the student loan settlement process, you can negotiate with your lender on your own, or you can work with a debt counselor or attorney to negotiate on your behalf.
Borrowers should consult an attorney specializing in student loans in cases of bankruptcy or significant disputes or if there’s a chance the loan might be beyond the statute of limitations for collection, says Mayotte.
After consulting with a lawyer, debt counselor or tax professional, you can start the settlement process by following these steps:
- Gather Proof: When you contact the lender or loan servicer, they will usually ask for proof that you cannot reasonably repay the amount owed. You will have to submit documentation of financial hardships, such as current pay stubs, recent tax returns, or proof of ongoing expenses like medical or childcare costs.
- Save Up Money: To settle your debt, you have to pay a lump sum of cash. The amount required can be substantial; for example, federal loans may only waive the collection costs, and you’ll have to pay the full amount of the principal and interest.
- Review Typical Settlement Procedures: payday loans in North Dakota Before entering into negotiations, it’s a good idea to research what kind of settlement you can expect. For example, federal loans have very specific guidelines for acceptable settlements, so you want to be sure you’re comfortable with those terms before talking with your lender. Every case is different, says Mayotte. For private loans, some borrowers have been successful paying 50 cents on the dollar or less.
- Contact the Loan Holder: Contact your loan holder. In some cases, that may be your lender or loan servicer. If you entered into default, your account may have been sold to a collection agency, so you’ll have to negotiate with the agency instead. Explain your circumstances, and offer to settle the loan with a lump sum payment.
- Get the Agreement in Writing: If your loan holder agrees to the student loan payoff proposal, make sure you get an agreement outlining the terms in writing. Once you make the payment to settle the loans, get written confirmation the loan is paid, and you’re no longer obligated to make payments.
Potential Drawbacks of Student Loan Settlement
Settling your student loans for less than what you owe can sound great, but there are some significant drawbacks to consider.
Your Credit Will Be Impacted
For federal loans, that means you’re 270 days or more behind on your payments. For private loans, it typically means being at least 120 days behind, although the exact time period may vary by lender. Missing so many payments can significantly damage your credit score, making other creditors wary of working with you.
