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Can You Settle Student Loans? Understanding Your Options and the Process

can you settle student loans

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Leaving school with student loan debt isn’t getting any cheaper. Currently, the average federal student loan debt is more than $37,000 per borrower. And that amount can depend on where you went to school.

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Not paying your student loans when you leave school means your loans could enter default. Defaulting on your student loans means the outstanding loan balance is immediately due, and your credit score could tank. This hurts your chances of borrowing in the future and can impact your ability to qualify for other important matters. Normally, federal student loans go into default if you haven’t made payments in 270 or more days.

Can you settle student loans after months (or years) of missed payments? Here’s how to tell if it’s the right choice for you.

What is Student Loan Settlement?

Student loan debt settlement is when you settle your outstanding debt for less than what you owe. This could mean only paying the principal loan balance and not the interest on your loan. It could also be waiving any outstanding collection fees for nonpayment. Note that settling student loans depends on many factors, including, most importantly, whether the loan is Federal or from a private bank. 

How Does Student Loan Settlement Work?

Student loan settlement works when your lender lets you settle your student loan outstanding balance for less than you owe. You can get your lender to settle your student loans by asking for a settlement offer; however, this may happen only under certain circumstances. Your lender might try other ways to get you to pay the full balance, including adjusting your payment plan or refinancing or consolidating your loans. But if the debt is delinquent enough, you might have a chance to settle the outstanding balance for less than you owe. To know if your student loans qualify for debt settlement, it’s best to contact a student loan debt relief attorney who can advise you of your rights based on understanding the facts surrounding the balances owed and to whom.

It’s not a guarantee that a lender will agree to a settlement agreement with you. It’s up to the lender’s discretion, and that settlement is not a set or a sure thing.

How to Qualify for Student Loan Settlement

There are no set standards on how to qualify for settlement. Each lender determines it on a case-by-case basis. For private student loan settlement, you would normally have had to be delinquent and defaulted on the loans. Generally, you will also need some hardship other than simply choosing other bills to pay or not agreeing with the balance owed. Once your debt is delinquent, your loans are usually with a debt collection agency, which could include a student loan debt collection law firm. 

Remember that lenders don’t have to agree to a settlement. If you want to try to settle your debt, you’ll need to qualify, which can take some time. 

Impact of Student Loan Settlement on Credit Score

If you want to settle your private student loans, they can come at a significant cost.

Usually, when you reach a settlement, you’ve gone many months — if not years — without making a student loan payment. This means your credit score has already suffered as a result. 

However, settling your student loans still leaves the default on your credit report for seven years. And it can show up as a settlement since you settled for less than the full amount required for repayment by your lender. It’s unrealistic to try to negotiate how the lender reports the settlement on your credit as they have credit reporting requirements. So you could see that bad mark on your credit report many years later.

Because this impacts your credit, having poor credit can hold you back from borrowing money in any form. This includes taking out a mortgage to buy a home, getting a credit card, or taking an auto loan. The lower your credit score, the less likely you are to get approved for loans and lines of credit. And if you get approved, you’ll pay a higher interest rate than borrowers with great or exceptional credit.

In some cases, a bad credit score can hurt in moments where you aren’t even borrowing. For instance, when completing a rental application, your landlord can pull your credit history or apply for homeowners’ insurance. In some states, your credit report could get pulled when you apply for insurance or complete an employment application. Even when you aren’t borrowing money, a bad credit score and history can impact your life beyond your finances. 

Alternatives to student loan settlement

Federal student aid comes with more protections and benefits than private student loans. These include income-driven repayment plans, deferment and forbearance, consolidation, public service loan forgiveness programs, and more. Regardless of the type of student loan borrower you are, you may want to try some alternatives, especially when settlement isn’t an option.

Income-driven repayment plans

You can ask your lender about enrolling in an income-driven repayment plan if you have federal student loans. There are a few different plans to choose from, and all let you make payments based on a percentage of your discretionary income. You’ll confirm or adjust details at least annually but should do it if your income, job, or household information changes. 

Refinance or consolidate

While consolidating your student loans won’t lower your interest rate, it keeps them as federal loans and the protections that come with it. If you choose to refinance, you will want to see how the new terms impact the loan in terms of the rate and time to repay the loan. It often isn’t considered a good choice to refinance fed loans into private ones since you can lose all the benefits of a federal student loan.  

Student loan refinancing is when you take out a new loan with a new interest rate and repayment terms, and your lender pays off your old loans. It puts your loans in the hands of private lenders, and you’ll lose those federal benefits.

Deferment or forbearance

Rather than skipping loan payments, you can place the loans in deferment or forbearance. Both federal and private student loan lenders offer forbearance options. Qualifications are usually based on your financial hardship. You can temporarily stop paying your loans without impacting your loan standing or taking a hit to your credit score and history. Ask your student loan servicer if you’re eligible and the steps you need to take to enroll.

Everyone has a different financial situation, and while some folks may settle student loan debt, it’s only feasible for some.

The Bottom Line

If you’ve struggled to pay your student loans, settling your outstanding debt might be an option. But keep in mind that settlements live on your credit report long after you’ve made your final payment, whether in a lump-sum payment or structured repayments over time. There might be other options and exploring all your choices is a good idea before settling your student loans. 

Whether you’re considering student loan debt settlement or other matters, you can call today for free at (866) 890-7337 or fill out our short contact form. We’ll respond as soon as possible. All conversations are confidential, and we never share or sell your information.

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