How to Negotiate a Student Loan Settlement

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After missing a student loan payment, your account will be considered delinquent. Once you miss payments for a certain period of time — 270 days for most federal loans and 120 days for most private student loans — your loan will enter default.

There are a few ways to get a student loan out of default. One potential strategy to consider is negotiating a student loan settlement with your loan holder to clear your balance.

Here’s what you should know about student loan settlement:

What is student loan settlement?

A student loan settlement is when you negotiate with a loan holder to settle the debt — sometimes for less than what you owe. If the loan holder agrees to a settlement, you’ll typically have to make a lump-sum payment to resolve the debt.

However, not all lenders or collections agencies are willing to negotiate settlements, especially if you’re not too far behind on your bills. But if you have a student loan in default, a debt collector might be willing to cut their losses and accept a lesser sum to clear the account.

Keep in mind: While a successful settlement means you’ll have one less debt to worry about, the negative impact to your credit from missed payments won’t just go away. Late payments can stay on your credit report and continue to impact your credit score for up to seven years.

Additionally, the debt will be marked as settled instead of paid in full, which might also hurt your credit and make it hard to access credit from other lenders in the future. Also note that the difference between what you owed and paid could be taxed as income.

How to negotiate student loan payoff

If a student loan settlement seems like the right fit for your situation, follow these four steps:

  1. Verify how much you owe. Before discussing payments or a payment plan with a loan holder or debt collector, make sure you know exactly how much you owe. If you have federal student loans, you can review the payoff amount through the National Student Loan Data System. If you have private student loans, your payoff amount will be listed in your credit report — you can use a site like to check this for free.
  2. Consider how much you can pay. Review your budget to determine what you can reasonably offer as a settlement amount. If you’re experiencing financial hardship, collect proof of income — such as pay stubs or current tax returns — and any evidence of large expenses to illustrate the situation for your loan holder.
  3. Negotiate with your loan holder. Once you’ve gathered your information, contact the loan holder or debt collector to discuss settling the debt as well as what amount they’ll accept as a settlement amount. Be prepared to fully explain your financial situation as what you’re prepared to pay. If you come to an agreement, make sure to get it in writing before making any payments.
  4. Follow through with the agreement. If your loan holder agrees to a settlement, be sure to pay the agreed-upon amount on time and in full to satisfy the arrangement. For federal loans, you’ll typically have 90 days to pay the settlement amount unless you’ve made a special arrangement for a longer term. For private student loans, this can vary by lender — be sure to double-check with them on the exact amount of time you’ll have to make the payment.

Learn More: Student Loan Rehabilitation vs. Consolidation: Getting Out of Default

When you can settle student loans

You’ll typically have a better chance at settling a defaulted student loan. If you’re up-to-date on payments, the loan holder likely won’t agree to a settlement since you haven’t shown any risk of not being able to pay.

Reasons for a federal student loan settlement

Here are some situations that could make a loan holder more willing to accept a settlement for federal student loans:

  • Can’t afford your payments: You’re facing significant financial hardship that makes it difficult to pay.
  • Not eligible for payment relief: You no longer qualify for student loan forbearance or deferment to temporarily pause your payments.
  • Lack of other options to get your loans out of default: You have already rehabilitated or consolidated your defaulted loans and aren’t eligible to do so again.
  • Access to a lump sum: You can afford to pay a lump sum toward your loans.

Reasons for a private student loan settlement

And here are a few situations where a private student loan lender could agree to a settlement:

  • Can’t afford your payments: You’re facing a financial setback — such as a job loss — that’s impacted your ability to make payments.
  • Credit has been damaged: Refinancing can be an option for lowering your interest rate or reducing your monthly payments. However, you’ll generally need good to excellent credit to qualify for student loan refinancing, which could make it hard to qualify if your credit has been damaged by delinquency or default.
  • Account is in collections: If your loan has been sent to collections, you’ll have a difficult time accessing assistance from your lender. But the collections agency might be able to help you with a settlement.
  • Access to a lump sum: You can access a sum of cash to use as a settlement.
Keep in mind: Settlement agreements are made on a case-by-case basis. Even if your loan is in default, a settlement isn’t guaranteed, so don’t purposely default if you’re hoping to settle.

Also note that debt collectors can use other means of collecting on your debt — and if they can collect payments this way, they could be less inclined to agree to a settlement. For example, if you have federal student loans, your wages could be garnished, and your tax refunds might be withheld. Or if you have private loans, the lender could sue you to try to recoup their losses.

Consider refinancing your student loans

If these situations don’t apply to you, another option for tackling your private student loans could be refinancing. Through refinancing, your existing loans will be paid off with a new private loan, leaving you with just one loan and payment.

Depending on your credit, refinancing might get you a lower interest rate and save you money on interest charges. Or you could opt to extend your repayment term to reduce your monthly payments and lessen the strain on your budget — though you’ll pay more in interest over time with a longer term.

Keep in mind: You’ll generally need good to excellent credit to qualify for refinancing — a good credit score is usually considered to be 700 or higher. There are also some lenders that offer refinancing for bad credit, but these loans usually come with higher interest rates than good credit loans.

If you’re struggling to get approved, applying with a creditworthy cosigner could improve your chances. Even if you don’t need a cosigner to qualify, having one could get you a lower interest rate than you’d get on your own. Just keep in mind that if you can’t make your payments, your cosigner will be on the hook.

If you decide to refinance your student loans, be sure to shop around and compare as many lenders as possible to find the right loan for your situation. Credible makes this easy: You can compare your prequalified rates from multiple lenders in two minutes — without affecting your credit score.

Find out if refinancing is right for you

  • Compare actual rates, not ballpark estimates – Unlock rates from multiple lenders in about 2 minutes
  • Won’t impact credit score – Checking rates on Credible won’t impact your credit score
  • Data privacy – We don’t sell your information, so you won’t get calls or emails from multiple lenders

See Your Refinancing Options
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How much a student loan settlement could save you

How much you might be able to save by settling a student loan will depend on the type of loan you have as well as on the loan holder. Here’s what you can generally expect:

Guidelines for federal student loans

If you’re looking to settle a federal student loan, here are the types of settlements typically offered according to Department of Education guidelines:

  • Waiver of collection costs: You don’t have to pay collection fees but are still responsible for paying the current principal and interest.
  • Waiver of 50% interest: You pay at least the current principal and get a break on 50% of the interest.
  • Waiver of 10% of principal and interest: You pay at least 90% of the current principal and interest balance.
  • Discretionary: If you don’t agree to pay one of the above amounts, an alternative settlement arrangement might be offered if approved by the Department of Education.
  • Non-standard compromise: This is a settlement outside of the standard agreements approved by the Department of Education. Note that it could be hard to obtain a non-standard agreement since debt collectors are restricted in how many they can offer in a given time.

Guidelines for private student loans

Private student loans don’t have set guidelines for settlements — instead, arrangements are made by individual lenders that each have their own student loan settlement policies.

Keep in mind that private student loan lenders tend to require high settlement amounts, even if you have a low income. This might not be a practical option for you if you’re already facing financial difficulties.

Tip: In most cases, lenders won’t entertain settlement negotiations until the debt has already entered default or been written. This means you’ll likely be discussing settlement with a collection agency — which might be more willing to accept a smaller settlement payment than your lender.

You might also be able to pitch another arrangement, such as making a few split payments to clear your debt instead of one large payment.

Check Out: How to Refinance Your Student Loans

Frequently asked questions about student loan settlements

Here are the answers to a few commonly asked questions regarding student loan settlement:

Does settling student loan debt hurt your credit?

Settling a debt for less than what you actually owed could hurt your credit. The debt will also be marked as settled on your credit report, which might make other lenders see you as a risk if you apply for other loans in the future.

However, if your credit has already been damaged by missed student loan payments, then a debt settlement could still be worth it. Ultimately, you’ll have to weigh the pros of settling for less than what you owe against the cons of another drop in your credit score.

Who can help you negotiate student loans?

While you can negotiate with a loan holder on your own, doing so can be intimidating. If you’d like help, here are a couple of options to consider:

  • An attorney: There are many lawyers who specialize in student loans. One of these attorneys can help you decide if settlement is a good fit for your situation and might also be willing to discuss it with your loan holder.
  • A debt settlement company: You could also think about working with a for-profit debt settlement company. Just keep in mind that these companies often charge fees for their services — usually 20% to 25% of the settlement amount. Also note that many of these companies will encourage you to stop making payments while they try to negotiate with your loan holder, which could severely damage your credit.
Watch out for scams! Unfortunately, there are plenty of scammers looking to take advantage of people desperate for student loan help. Here are some student loan forgiveness scam warning signs to keep an eye out for:

  • Promising immediate relief
  • Wanting you to pay money upfront
  • Asking for your Social Security number or other personal information
  • Claiming to be affiliated with a government agency
  • Using high-pressure sales tactics
  • Wanting you to sign a form to give them power of attorney

Go with your gut — if what a company is promising seems too good to be true, it probably is.

What should you expect after settling?

If you’re able to successfully settle your student loan debt, you’ll likely receive a letter from your loan holder or debt collector confirming that you’ve fulfilled the agreement. The balance will be removed from your credit report — though remember that the record of the loan being settled can show up on your credit report for up to seven years.

Keep Reading: Income-Driven Repayment: Which Plan Should You Choose?

About the author
Taylor Medine
Taylor Medine

Taylor Medine is a Credible authority on personal finance. Her work has been featured on Bankrate, Experian, The Balance, Business Insider, Credit Karma, and more. She’s also the author of The 60-Minute Money Plan, a self-published intro to budgeting guide for people who hate budgeting.

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