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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:
Don’t to try and force a debt settlement. You’ll severely damage your credit, can be added to the amount you owe, the savings may be less than you hope and there’s no guarantee your lender will negotiate with you.
Federal and private student lenders will require your loans to be in or near default to start settlement negotiations. Federal student loans enter default after 270 days of past-due payments. Timelines vary for private student loans, but default often occurs after 90 days of missed payments, according to the Consumer Financial Protection Bureau.
Federal student loans are rarely discharged via , but might be an option to get rid of your private loans.
Federal student loans have other . Defaulted federal student loans can be discharged in instances such as and , but they aren’t eligible for loan forgiveness. If you’d otherwise qualify for forgiveness, return your loans to good standing instead of settling them; you’ll likely save more money.
Federal student loan settlements are not common because the Department of Education and other federal student loan holders have ways to get money from defaulted loans, such as and . They may make an exception in the following situations:
Settlements for defaulted private student loans are more common because these lenders don’t have the collection leverage of their federal counterparts. A private loan holder may accept a settlement in the following instances:
Private student loan debt settlement amounts vary greatly. Experts say some lenders may not accept less than 80% of the total owed, whereas other lenders will take less than 50%.
Savings aren’t nearly as big for federal student loans. The Department of Education provides its loan holders with specific guidelines for how much of the debt is OK to waive. You may receive one of the following:
If you have older loans originated under the Federal Family Education Loan Program, your guarantor — the organization that takes ownership of these loans in default — has an additional option: waiving 30% of your principal and interest.
Federal student loan holders can accept settlement offers for less than these amounts, but it’s rare. Alternate settlement offers require additional approval, either from within the organization or the Department of Education itself, as they further affect the loan’s profitability.
Whether you settle federal or private student loans, you may owe income taxes on the amount you don’t pay. Contact a tax professional to find out the implications for your situation.
You can attempt to settle student loans on your own or with the help of a more experienced negotiator.
If you and your loan holder agree to a settlement, get the offer in writing. Once you’ve paid the amount as required, make sure you receive a paid-in-full receipt. You’ll want to hang on to that in case questions about your debt arise in the future.
If you’re struggling with your student loan debt, first speak with or lender to:
If your problem is with your lender or servicer or you’re not getting the help you need, look for a legitimate student loan help organization that offers counseling. Consider these vetted resources for ; they are established organizations with verified histories:
Many of these organizations offer advice for free. In some cases, you may need to pay a fee, as with a certified nonprofit credit counseling agency or if you hire an attorney.
None of the organizations above calls, texts or emails borrowers with offers of debt resolution.
Offers of help that you have not sought out are likely to be scams. While it’s not illegal for companies to charge for services such as consolidation or enrollment in a payment plan, those are steps you can do yourself for free.
Avoid any debt relief companies that demand money upfront.