Can I Just Settle My Student Loans?

As with all yes or no questions, the answer is:


You can only settle your federal student loans if you are in default. If you are current with your payment plan, the government will not settle with you, period.

If you are in default, there is basically no negotiation. The Department of Education, through its assigned collections agency, has three options for settlement.

  1. Pay 100% of everything you owe, no collection fee.

  2. Pay 100% of the principal, 50% of the interest, no collection fee.

  3. Pay 90% of principal and interest, no collection fee.

There are situations where option 2 and option 3 can be quite different. I settled one for a client once where the difference was about $10,000. The collections agency said that only option 2 was available. I had to push them to offer option 3, which was a huge savings for the client.

Do I settle federal loans often? No. The problem is that most clients do not have those lump sums available to them. And it also comes down to financial planning. Sometimes it makes more sense to invest the lump sum money into something else (home purchase, retirement account) and just get your loans out of default and enter a payment plan.

With private loans, settlement options can be better. But again, you have to be in default or behind on payments. Private lenders are not going to agree to take less than what is owed if you are current with your payments.

Are you willing to hurt your credit, and the credit of your co-signer, if you have one, in order to maybe be able to settle your loans later?

Settlement amounts are generally lower for lump sum offers. If you need payments over time, generally reduction of amount owed is going to be less, or none at all, it might simply be a reduction or elimination of interest if you need a payment option.

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