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Hello, and welcome to the course called Introduction to Can You Negotiate Student Loans! In this course, we’re going to go over how you can negotiate your student loans.

Student loan debt is a huge problem in America. It’s estimated that 44 million Americans have student loans—more than half of them are in default or delinquency on their loans.

That’s why it’s so important for you to learn how you can negotiate your student loans. Learning how to do so will help you avoid the pitfalls of student loan debt, and it will allow you to pay off your loans faster than if you don’t know what you’re doing.

In this course, we’ll cover some basic information about student loans: what they are, who offers them (and why), what happens when you default on them, etc. We’ll also talk about how negotiation works with these types of loans—what strategies are available for negotiating a lower interest rate or lower payments (or both!). We’ll also discuss whether or not it’s worth it for someone who has already started paying off their loan(s).

How To Negotiate Student Loan Settlement

While Congress has provided significant relief to millions of student loan borrowers in response to the Covid-19 pandemic, these efforts have done little to address the many borrowers in default. According to Federal Student Aid, there were 5.3 million borrowers in default as of the end of March 2021. Combined, those borrowers owed $116.6 billion—approximately 7% of the nation’s $1.6 trillion student loan debt.

If you’ve defaulted on your student loans, there is a chance you can settle your student loan debt for less than you owe. However, negotiating student loan payoff terms can be a time-consuming and expensive process. We’ll walk you through how it works.

What Is Student Loan Settlement?

If you have a large student loan balance, settling loans is a way to reduce what you owe and eliminate any future obligation to repay the loans.

Student loan settlement is a process where you negotiate with your loan servicers or collection agencies and agree to make a lump-sum payment. If the loan servicer or agency agrees to the terms, you will pay an amount that is lower than what you owe in outstanding loans, collection fees and interest charges.

Once you’ve followed the terms of the settlement, the loan is marked as settled, and your obligation for the loans is satisfied. The default status will be removed from your credit report, but the settlement can still affect your credit.

When Can You Settle Student Loans?

You can negotiate a student loan payoff, but it depends on the current status of your loans. If your loans are in good standing, lenders won’t consider a settlement request. Adam Minsky, an attorney specializing in student loan law, says you’re eligible for student loan payoff only if your loans are in default.

“In most cases, only defaulted student loans can be settled or negotiated,” he says. “Defaulting can have very serious consequences including penalties or fees, negative credit reporting, collections and litigation.”

Federal Student Loan Settlement

Federal loan settlements are possible, but they’re extremely rare. That’s because federal student loans are difficult to discharge in bankruptcy, and loan servicers can take aggressive measures to collect payments.

If you’ve defaulted on your federal student loans—typically meaning you’re at least 270 days late on payments—loan servicers can send your account to collections, garnish your wages and even seize your tax refund.

Because they have multiple ways to recoup their money, federal loan servicers have less incentive to negotiate with borrowers. You can only qualify in extenuating circumstances, and you’ll still have to pay the majority of your debt.

“It is possible to settle federal loans that are in default,” says Minsky.” But the settlement would have to be in a lump sum, and federal guidelines limit how much of a balance reduction you can get through a settlement involving defaulted federal student loans. In many cases, this results in only a marginal benefit.”

Private Student Loan Settlement

With private student loans, you may be able to negotiate a settlement if you are in default. This usually means you’re 120 days late on payments, but timelines vary by lender.

When it comes to negotiating student loan debt, it’s important to know that private student loan lenders don’t have the same options as federal loan servicers to collect the money owed, and they may be more likely to settle your loans. But this also depends on the lender, age of the debt, the circumstances for the settlement and the borrower’s legal dispute.

How to Negotiate Student Loan Payoff

While there are some differences between settlements of federal and private student loans, the student loan payoff process will generally require the following steps:

1. Gather Documentation

When you request a student loan settlement, you usually have to show that you can’t repay the loans through other methods, including alternative payment plans.

To make your case, collect the following documentation:

• Health records. If you were diagnosed with a mental or physical illness that has made it impossible to hold a steady job, request a letter from your doctor detailing your diagnosis and limited ability to work.
• Income. Gather copies of your pay stubs if you’re working, W-2 forms and recent tax returns.
• Financial records. If you have extenuating circumstances that affect your finances, such as becoming the guardian for a relative’s children or caring for an ill spouse, include any of those records. Court documents, home health aid bills or daycare costs are just some examples that can help your case.
• Credit reports. Lenders will review your credit report. If you have limited access to credit, such as only having your loans and a secured credit card, make sure you include copies of your credit report.
• Inheritance information. Collection agencies will sometimes ask if a relative can help you with the outstanding debt. If that’s not an option, include any information you have. For example, if your parents have used up their savings to help you with living expenses or debt, include the amounts given since that will indicate there is no potential for future inheritance.

2. Contact the Collections Agency

If your loans are in default, your lender has likely sent your account to collections. The collections agency is responsible for contacting you and attempting to get repayment. If the agency has contacted you, you can call or email them. You can contact your lender or federal loan servicer if you aren’t sure of the collections agency.

Not sure who your loan servicer is? You can find out with the National Student Loan Data System or by reviewing your credit report at AnnualCreditReport.com.

3. Negotiate Settlement Terms

When you talk to the collection agency representative, tell them that you would like to settle the debt by paying a portion of the total amount owed. If you have defaulted on your loans because of a financial hardship or medical issue, include those reasons.

There are four settlement options for federal student loans:

• Principal + interest. With this settlement, you will pay only the outstanding principal and interest; the collection costs are waived.
• Principal + 50% interest. If you qualify for this option, you will pay the outstanding principal and 50% of the interest owed. Your collection costs are waived.
• 90% principal + interest. With this settlement, you will pay 90% of the outstanding principal and interest charges, and all collections costs are waived.
• Discretionary compromise. In some cases, you may qualify for a discretionary compromise and will pay less than what would be owed under the other three standard options. For example, you could pay as little as 85% of the amounts owed, but your request must get approved by the Department of Education.

Federal loan settlement options *Assumes $30,000 principal, $7,000 interest and $5,000 collection costs
	Principal + interest	Principal + 50% interest	90% principal + interest	Discretionary compromise
Minimum amount paid	$37,000	$38,500	$33,300	$31,450

With private student loans, you may be able to settle the loan for 40% to 70% of the amount owed. Terms will vary by lender and the collection agency they use.

4. Review the Settlement Agreement

Once you and the agency come to an agreement, they will send you a letter detailing the settlement terms. It will also outline how much you have to pay and the deadline for the payment. If you don’t pay the full amount by that date, the agreement will be voided, and you will owe the total outstanding amount, plus any additional interest and fees.

5. Make Your Settlement Payment

Make your lump sum payment to the collection agency and request a letter or email confirming its receipt. Payments can typically be made by personal check, cashier’s check, credit or debit card, money order or electronically through the lender’s direct debit program.

Keep records of all of your communications with the agency, including the settlement agreement, confirmation of payment and student loan payoff date.

Drawbacks to Settling Student Loan Debt

While a student loan settlement may sound appealing, there are some significant drawbacks to this approach:

You’ll Need a Substantial Amount of Cash

To qualify for a settlement, you’ll need to make an upfront lump-sum payment for the majority of the money you owe. Depending on your situation, you may have to pay as much as 90% of the amount owed. So, if you owe the agency $30,000, that means you’ll need to have $27,000 on hand to make the required payment.

It Can Damage Your Credit

Settling your debt for less than you owe will be marked on your credit report, and it will stay there for seven years before falling off. Settling debt is also viewed by lenders as derogatory and will reduce your credit score.

You May Have to Pay Taxes on the Settled Amount

When you settle debt, you may have to pay extra taxes since the waived or reduced portion might count as “income” for tax purposes.

Consult with a tax professional to determine how to handle your settlement on your tax return.

4 Alternatives to Student Loan Settlement

While student loan settlements can be helpful, they’re not for everyone. If you’re in default or are in danger of falling behind on your payments, these alternative strategies may help:

1. Student Loan Rehabilitation

If you defaulted on federal loans, one option is student loan rehabilitation. Your servicer will determine a reasonable monthly payment for you. If you make that payment nine times within 20 days of its due date, your loans will be moved out of default. Contact your loan servicer to see if loan rehabilitation is an option for you.

2. Loan Consolidation

With this approach, you consolidate your defaulted federal loans with a Direct Consolidation Loan. You must make three consecutive, on-time payments before you can consolidate, and you must agree to make payments under an income-driven repayment (IDR) plan after consolidation. Contact your loan servicer to begin the consolidation process.

3. Alternative Payment Plans

You may be eligible for an alternative payment plan if you can’t afford your current payments for both federal and private student loans. With federal loans, you may be able to take advantage of IDR plans, and private lenders might allow you to make reduced or interest-only payments temporarily. If you’re struggling with your debt, call your lender to discuss your options.

4. Student Loan Refinancing

If you’re at risk of missing payments, you can refinance your loans with a private student loan refinancing lender. The original loans will be paid off, and you may qualify for a lower interest rate or a longer repayment term to reduce your monthly payments.

If you’ve defaulted on your existing loans, your credit score is likely too low to qualify for student loan refinancing on your own. However, you may get approved if you have a creditworthy cosigner apply with you. You can get rate quotes from top refinancing lenders online.

Student loans are a beast.

They’re big, they’ll be around for the next 20 years, and even if you have a great job right out of college, it’s still going to take time to pay them off. But don’t despair! The best way to deal with student debt is to keep your head up and make it work for you.

Consider your options:

-If you can afford it, consider taking out federal loans instead of private ones. Federal loans have better repayment options and lower interest rates.

-If you’re struggling, talk to your loan provider about deferment or forbearance options. You may be able to get help temporarily while you figure out how to make ends meet.

-Make sure you’re getting the most out of your money: check out our tips on how to save money on student loans here!