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Spoiler Alert: The answer is usually no.
But before we dive into the nitty-gritty, let’s address the elephant in the room: settling federal student loans is rarely a good idea. It’s often a time-consuming, risky endeavor that offers minimal savings and can negatively impact your credit score In short, it’s usually a financial faux pas.
So why can’t you settle student loans in good standing?
Federal student loan settlements are reserved for loans in default. This indicates that you have received collection calls and letters from your loan servicer, missed at least nine monthly payments, and paid late fees and interest. Not exactly a picnic, right?.
But wait. there’s more!
Settle doesn’t ensure financial bliss, even if your loans are in default. There are three different kinds of compromises, and each has disadvantages of its own:
- Standard Compromise: You pay the current principal and half the interest, with a waiver of projected collection costs and fees.
- Discretionary Compromise: You offer less than the standard compromise amount, but you need to prove financial hardship and provide extensive documentation.
- Nonstandard Compromise: These are rare and offered on a minimal basis, usually for small discounts.
Still tempted to settle?
Consider the potential consequences:
- Taxability: The canceled debt amount is often taxable, meaning you’ll owe the IRS and state tax authorities more money.
- Credit Score Hit: Your credit score will take a major hit during delinquency and may not recover quickly even after settlement.
- Limited Investment Opportunities: Settling means you lose the chance to invest the money you would have used to pay off the loan, potentially missing out on a positive return.
Alternatives to Settlement:
Instead of settling, explore these options:
- Consolidate your loans: This can help you get out of default and simplify your repayment process.
- Rehabilitate your loans: This allows you to bring your loans back to good standing and regain eligibility for certain benefits.
- Income-Driven Repayment (IDR) plans: These plans adjust your monthly payments based on your income and family size, potentially lowering your payments significantly.
- Student loan forgiveness programs: Depending on your situation, you may qualify for forgiveness programs based on income, disability, or other factors.
The Bottom Line:
Settling federal student loans is usually a bad financial move. Instead, explore alternative options that can help you manage your debt without sacrificing your financial future. Remember, knowledge is power, so arm yourself with information and make informed decisions about your student loan repayment journey.
Bonus Tip:
Speak with a certified specialist such as an accountant, financial planner, or lawyer if you’re thinking about paying off your student loans. They can assist you in weighing your options and choosing the best course of action in terms of finances.
When you can settle student loans
For settlement talks to begin, federal and private student lenders will need your loans to be in default or very close to it. Federal student loans enter default after 270 days of past-due payments. For private student loans, there are different timelines, but the Consumer Financial Protection Bureau states that default typically happens 90 days after missed payments.
Although it is uncommon for federal student loans to be discharged through bankruptcy, you may be able to eliminate your private debts through private loan discharge.
Federal student loans have other options that could eliminate your debt. Federal student loans in default are not eligible for loan forgiveness, but they may be discharged in certain circumstances, such as school fraud or total and permanent disability. Return your loans to good standing rather than paying them off if you would otherwise be eligible for forgiveness; you’ll probably save more money that way.
How much student loan settlement could save you
Private student loan debt settlement amounts vary greatly. According to experts, certain lenders might not accept less than 80% of the total amount owed, while other lenders might accept less than 200%.
Savings aren’t nearly as big for federal student loans. The Department of Education gives its loan holders precise guidelines regarding the amount of debt that can be waived. You may receive one of the following:
- 100% of collection costs waived.
- 50% of interest owed waived.
- 10% of principal and interest waived.
In the event that you have outstanding loans from the Federal Family Education Loan Program, you, as the guarantee, have an additional option to choose from: waiving the principal and interest paid to the organization that assumes ownership of your loans in default.
Federal student loan holders can accept settlement offers for less than these amounts, but it’s rare. Since they have a greater impact on the loan’s profitability, alternative settlement offers need further approval from the Department of Education or from within the organization.
In the event that you settle your federal or private student loans, you might be required to pay income taxes on the remaining balance. Contact a tax professional to find out the implications for your situation.
What Everyone’s Getting Wrong About Student Loans
FAQ
Can I make a settlement offer on student loans?
Can you settle debt in good standing?
Do student loans go away after 7 years?
Can I negotiate a loan payoff?
Is a student loan settlement possible?
Student loan settlement is possible, but you’re at the mercy of your lender to accept less than you owe. Don’t expect to negotiate a settlement unless: Your loans are in or near default. Your loan holder would make more money by settling than by pursuing the debt.
Can you settle a student loan if you default?
You typically can’t settle if your student loans are in good standing and you make timely payments every month. Even if you’re a little late on your last payment, you’re usually not eligible until default. However, it’s not a good idea to intentionally default to settle.
Are private student loan settlements better than federal student loans?
“You typically get a much better deal with private student loan settlements than you do with federal student loan settlements,” says Stanley Tate, a student loan lawyer. For example, Tate says he settled a client’s $68,000 federal student loan debt for $55,000 and a $61,000 private student loan balance for $26,000.
Should you negotiate a student loan settlement?
Don’t expect to negotiate a settlement unless: Your loans are in or near default. Your loan holder would make more money by settling than by pursuing the debt. You have or can save enough cash to pay the settlement amount in full or over a few installments. Don’t miss student loan payments to try and force a debt settlement.