Written By Caitlin See
Updated on May 20, 2023
If you’re drowning in federal or private student loans, you might be wondering, “Can you settle student loan debt?”
It’s possible to negotiate a student loan payoff. But a student loan settlement should only be considered if your loans are in, or nearing, default status. Here’s what you need to know about settling student loan debt.
What is a student loan settlement?
Student loan settlement is when you negotiate a student loan payoff for an amount less than what you currently owe.
This strategy can be used for both private and federal loans. But it’s only available for loans that aren’t in good standing.
How much student loan debt can be settled?
We reached out to student loan lawyer Stanley Tate to answer some of the most common questions related to student loan debt settlement. To start, we wanted to know how much debt a borrower could expect to settle.
Defaulted loans under the Department of Education typically settle for around 85% to 90% of the outstanding balance. However, federal student loan settlements aren’t common practice, considering the federal government has other ways to tap into your money (e.g. tax refund or wage garnishment). The federal government also has alternative paths to get your loans out of default, such as loan rehabilitation.
Private student loan settlements vary by lender. Tate has personally seen settlements ranging anywhere from 50% to 90% of the balance.
For example, Tate helped his client, Erica, save $100,000 through private student loan settlement. He successfully negotiated a student loan payoff that settled her outstanding $182,582 for a lump sum payment of $82,100.
That said, each lender determines whether it’s willing to reach a settlement and for how much.
When it doesn’t make sense to pursue a student loan settlement
If you can afford your monthly payments, don’t purposely miss payments to force a student loan debt settlement.
First, your lender isn’t obligated to negotiate with you. Second, missing payments and going into default status reduces your credit score and puts a stain on your payment history. This can damage your finances long-term and make borrowing in the future (e.g. buying a home) more difficult.
You might also have other consequences, such as:
- Accruing debt collection charges that can cost up to 25% of your student loan balance.
- Having your wages, tax refund or Social Security benefits be subject to garnishment.
- Being sued by your lender.
Therefore, debt settlement should be reserved for student loan borrowers who’ve exhausted all other repayment plans and avenues and need a resolution for their defaulted loans.
When to settle student loan debt
You can’t negotiate a student loan payoff until your loans enter default.
For federal student loans, your loan enters default status once its 270 days past due. Private lenders typically have a shorter default window (e.g. 120 days), but it varies by lender according to the loan terms found in the promissory note.
If you’re nearing default status, settling your student debt might be a viable option.
If you have access to a large chunk of money (e.g. inheritance, savings or retirement funds), you’ll be in a better position to negotiate a student loan payoff with your lender. But a lump sum isn’t necessarily required.
Some lenders might be willing to negotiate a lower amount with the option to make limited monthly payments. But again, it’s up to your lender to decide what they’re willing to settle for.
Based on Tate’s experience, there’s no standard for what monthly payment settlements look like or who qualifies for this type of settlement. Instead, the ability to negotiate a settlement for monthly payments “comes down to things like your loan balance, the length of time the loan has been in default, the original creditor, the collection agency, etc.”
For example, Tate was able to negotiate a student loan payoff for his client Eddie that dropped his obligation from roughly $70,000 to only $20,000. But instead of making a lump sum payment, Eddie was able to make an initial payment, followed by 22 months of additional payments to complete the agreement.
How to settle your student loan debt
If you want to pursue student loan settlement, you can attempt to negotiate a deal on your own or hire an student loan law expert like Tate to guide you through the process. Reach out to us if you’d like additional recommendations for student loan lawyers in your region.
If you prefer to handle the negotiations yourself, contact your lender or the collection agency handling your defaulted loan to discuss your settlement options.
You’ll need to demonstrate significant financial hardship that would prevent you from being able to pay back your loans. In general, you need to prove that you have very little income and assets. However, your lender will ultimately determine the threshold for hardship.
It’s best to allow the lender or debt collector to make the initial offer as a starting point for negotiations. Be prepared to make a counteroffer based on the lump sum payment that you can afford.
Once you’ve negotiated a student loan payoff, make sure you get the settlement agreement in writing. You should also request a written confirmation of your paid-in-full status once you’ve completed your end of the bargain.
FAQs for student loan settlement
If you can make a lump sum payment, you’ll likely receive a better settlement offer. But depending on your financial situation and lender, you might be able to negotiate monthly payments.
Yes and no. Your lender will pull your credit report to review your other debts (e.g. mortgage, auto loan, etc.) and payment history with other creditors. But it can’t access your bank accounts or other sensitive financial information. Your lender will only know what you tell them in terms of how much money you have available to put toward your student debt.
Both the primary borrower and cosigner’s credit is impacted negatively by a defaulted cosigned student loan. If you can negotiate a payoff, you’ll need to ensure the settlement explicitly resolves the debt for all parties, including the cosigner.
You won’t be eligible to remove a cosigner if your student debt is delinquent or in default. If you plan to pursue debt settlement, you’ll need to take action on removing a cosigner before you miss a student loan payment. You can do this by completing the terms of your cosigner release (e.g. 24 months of on-time payments) or by refinancing the loan solely into your own name.
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