It is possible to settle your student loans, but you will not likely settle for pennies. Depending on whether you want to negotiate a payoff for federal student loans or private student loans, you’ll need a lot of cash for a lump sum settlement or enough money to make monthly payments quickly. In this post, I’ll talk about what you need to know before negotiating a student loan debt settlement.
What is a settlement for a student loan?
When you haven’t paid on your student loans for a while, and the loan holder agrees to take less money than you owe, this is called a student loan settlement. There are three types of ways to pay off a student loan:
- One substantial payment settles the outstanding balance for less than what’s owed. This settlement offers the highest reduction.
- You agree to make monthly payments for months or years. Miss a payment, and you repay the full loan amount less any payments made.
- You make a lump sum payment and then monthly payments until the balance is paid off.
Most federal student loan settlements require a lump sum payment within three months. Private student loan settlements vary by a collection agency, loan holder, loan age, loan balance, etc.
Can a student loan be refinanced?
Your student loan account must be in default or charged off to negotiate a lower payoff amount. Settlement is impossible if you’re still making monthly payments, in deferment, forbearance, or past due but not in default. Asking your loan servicer for a discount if you pay off your balance immediately won’t work, student loan investment. The longer you take to repay loans, the more investors make. A settlement is possible when the lender stops receiving payments and loans are delinquent.
Good-standing student loans?
Good-standing federal and private student loans can’t be settled. Both federal and private loans don’t allow loan settlement until default, which can take 270 days. You don’t want late payments reported, especially if you have a cosigner if you have good credit. Lenders won’t waive accrued interest or collection fees if your loan is current. From their perspective, offering a discount for early loan payments isn’t smart business. The lender gets paid monthly interest. As you delay, your lender makes more money. Borrowers consider strategic default because they can’t get a settlement while their loans are in good standing. Missing student loan payments has repercussions.
When I settle my student loan, how much will I save?
Some lenders accept 40% principal and interest. Others require 75%.
Expectations after settling?
After payment and settlement, you’ll receive a debt clearance letter. This letter proves you’re no longer responsible for the loan. The IRS will send you a 1099-C Cancellation of Debt notice at year’s end. Unpaid student loan balances are taxable on a 1099-C. You must file this with your taxes and may owe income tax. The IRS has a process to avoid taxing cancelled amounts. Consult a tax pro to determine eligibility.