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Debt Settlement For Student Loans: What Are Your Options?

With the passage of time, student loans are becoming more and more common. Where it helps people borrow money, at the same time, it’s a huge financial burden too, especially when you don’t have enough in your account to pay the loan off. As per a research, 42.7 million people in the US have federal student loans, it makes up around 16% of the US adults in debt. On top of it all, the economy isn’t so good nowadays and people are struggling financially mainly because of low paying jobs or no jobs at all. In such a tough situation, it’s understandable that paying off your student loan in full becomes a far thought.

Fortunately, there are multiple debt relief options out there for people struggling with debt. Debt settlement is one of the most popular ones among all the other options mainly because it reduces your loan.

Understanding Student Loan Debt Settlement

Student loan debt settlement involves the negotiation between a borrower and a lender where the borrower offers a lump sum amount to the lender that is less than the full amount. If the lender agrees, he then waives off the rest of your loan amount and accepts the lump sum. Once you make your payments as per the agreement, your loan is considered “settled”.

The catch here is that it’s easier to settle your debt with credit card companies or private lenders but when it comes to student loans, especially the federal one, lenders are a little reluctant to settle for less than the full amount. In simpler words, student loan debt settlement is possible but it should only be considered when it’s your last resort.

When Can You Settle Student Loans?

Here are some situations that make you eligible for a debt settlement;

1-When Your Loans Are In Default

One of the most important criterias that make you eligible for a student loan debt settlement is when your loans are in default. In case of federal student loans, your loan goes into default after 270 days of missed payments. On the other hand, if you’ve taken up a private loan, it’ll go into default after 90 days of no payment. The reason why the default status is important is that this way, your lender or servicer will be more likely to approve and accept your settlement request. Especially if they believe that you won’t be able to pay the full amount, they’ll take the lump sum to recover at least some of their loss.

2-You Are In A Real Financial Hardship

If you want your debt settlement to go successful then it’s important that you are facing genuine financial hardship and that your missed payments are justified. It can be anything from a medical emergency to income loss or even a divorce. You should only consider settling your debt if you have proof of your hardship, you really are unable to pay off your loan as your bank account is empty and that you don’t have any access to any assets that can help you pay off your outstanding balance. In a nutshell, debt settlement for student loans should be your last resort because it does come with several downsides.

3-Understand Federal Vs Private Loan

When it comes to private student loan lenders, they are more flexible and they might accept your settlement offer easily. However, things get a little more tricky when it comes to federal loans. A federal loan provider isn’t very flexible and they are usually very strict when it comes to recovering their loan. They only consider a settlement when the borrower is in a real and tough financial hardship.

Effective Tips To Negotiate A Student Loan Debt Settlement

Debt settlement does help reduce your debt but it’s a little tricky and the journey can be bumpy for you especially if you don’t follow the right path. If this doesn’t seem like your cup of tea then it’s best to involve a third party debt settlement company to settle your loan. These companies are more experienced and they use a more professional approach to settle your loan with your servicer.

Here’s what you need to do in order to settle your student loan;

1-Contact Your Loan Servicer

The very first step of the process is to first ask your servicer if debt settlement is an option or not. In case of a private lender, the process is easier and the lender might be open to settling the debt. However, when it comes to federal loans, you’ll have to work with a collection agency of the US Department of Education.

2-Prepare And Make A Lump Sum Offer

In a debt settlement, most servicers will just accept lump sum payments instead of installments. So before starting a settlement negotiation, make sure that you have that lump sum ready so that you don’t further delay the payment after your offer is accepted. Moreover, make a realistic offer if you want your settlement to go through. It should be between 50% to 90% of the total amount of loan because that’s the offer lenders usually accept.

3-Get Everything Documented

Before making any payments, make sure to get everything in written form. For example, if your lender agrees on settling your debt then ask him for a written agreement which has the details listed. The details must include the total amount of your loan, the lump sum agreed upon, the fact that the rest of the amount will be forgiven and the timeline decided. You should have it all in documentation to protect yourself from any legal issues in the future.

4-Confirm The Closure After Making The Payment

After you’ve made your payment to the lender, ensure that your debt has been reported to the credit bureau as “settled” or “paid”. This is the most important step because if your lender doesn’t report to your bureau about the settlement, it can wreak havoc on your credit report and score.

Pros And Cons Of Settling Student Loan Debt

Settling your student loan is definitely the right option when you are struggling financially and don’t really see a path forward. The other alternative is to declare bankruptcy but it’s the worst of all options as it can do more damage to your credit. On the other hand, debt settlement is worth a try but it comes with its own pros and cons, including;

Pros

Cons

Overall Verdict

Student loan debt settlement is definitely not a first line option. It’s just reserved for cases where someone’s struggling with their finances and has a valid reason that explains why they can’t pay their debt off. It’s best to first talk to a financial advisor or a student loan counselor to confirm whether or not you are making the right decision.

FAQs

Q1.How Much Does A Student Loan Settlement Cost?

The cost of a student loan debt settlement depends on the lender, the total amount you owe and your financial situation. Most attorneys and settlement companies charge around 15% to 20% of the total amount you owe.

Q2.What Happens If I Don’t Pay Student Loan?

If you don’t make your monthly payments and start neglecting your loan, you’ll face a lot of consequences including credit damage. A poor credit can disqualify you for future loans and it can even affect your housing, rentals and jobs.

Q3. What Is The Maximum Student Loan Forgiveness?

There’s no set number that defines how much your lender can forgive. It all depends on what you offer them as a lump sum and of course your financial hardship. If things are really financially bad at your end, chances are that your lender might be willing to forgive a good percentage of your loan.

Looking for a debt settlement company that can help you settle your student loan without any hassle? Try Mountains Debt Relief for a smooth and seamless settlement journey!