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Settling a Federal Student Loan with Missouri Department of Higher Education

July 31, 2018

Settling a federal student loan with Missouri Department of Higher Education is possible. It’s just slightly more complicated to do than settling a private student loan. The process is different.

Let’s talk about that.

Student loan attorney Stanley Tate after settling a federal student loan.

Reviewing a checklist for a recent offer to settle a defaulted federal student loan while out for breakfast in St Louis.

The Missouri Department of Higher Education  Federal Student Loans

Until July 1, 2010, the Department made federal student loans to students under the Federal Family Education Loan program. Under that program, the loan was made by a private bank. From there, MDHE would guarantee the loans. By acting as a guarantor of the loans, MDHE was agreeing to (a) pay the bank after a borrower defaulted on the loan; and (b) service the loan while it was in default. The federal government’s role in this transaction was to reimburse MDHE for paying the bank and then paying a fee to MDHE for trying to collect on the defaulted loan.

If you’re interested in learning more about the end of the FFEL program, read How the Bank’s Student Loan Gravy Train Finally Got Halted by Abigail Field.

As you can imagine, this was all incredibly expensive. That’s why, back in April 2009, President Obama proposed to end the program.

In 2010, President Obama’s proposal was included in the Health Care and Education Reconciliation Act of 2010. Under that Act, the FFEL program was eliminated. That left only the Perkins Loan Program and the Direct Loan program as the programs the government made federal student loans to borrowers.

Typically, you have to be in default to settle a federal student loan

The Department has broad discretion to compromise, that is, settle, a federal student loan. 1 But you can’t settle any federal student loan. Nope. To settle a federal student loan, you have to be in default.2. And settlement is only offered as a last resort after other repayment options have been exhausted.

The Department of Education has approved standardized settlement guidelines

Since MDHE is a guarantor of student loans, it has to follow the standardized settlement guidelines provided by the Department of Education.3 Here are those guidelines:

  1. Collection costs can be waived. Collection costs can be waived to obtain payment of principal and interest in full.
  2. 30% of principal and interest owing can be waived. The guarantor agency can waive 30% of principal and interest owing to recover the remaining 70%. The guarantor agency is typically reluctant to agree to this waiver. It’s suspected this is because amounts compromised will be taken out of the 30% that the agency makes on the loan collection.
  3. Compromise of more than 30% of outstanding principal is interest are possible.  It is possible to settle a federal student loan for more than 30% of outstanding principal and interest. But there’s a catch. If the guarantor agency agrees to that type of compromise, only the agency would be bound by the agreement. The Department would not. So that means  even if you settle with the agency, the Department could still come after you for the balance owed.

How to Request a Settlement From MDHE

The procedure for requesting a settlement is pretty straightforward. Typically, if you contact the collection company handling your defaulted loan, say, Performant Financial Corp., the agent will offer you a settlement amount. But if they don’t, consider submitting a written request to MDHES for an amount that complies with the guidelines. If you do that, consider submitting supporting financial documentation (tax return, W2’s, etc.) to support your offer.

In my experience, it usually takes no more than a week to get a response back as to whether your offer has been accepted, countered, or rejected. That said, sometimes it can take much, much longer than that. So be prepared.

What information should be included in the settlement letter

Once you’re offer is accepted, ask for a formal settlement offer letter from MDHE. That letter should contain:

  • Your name;
  • The account number;
  • The compromise amount; and
  • The payment deadline

Typically, the deadline is between 30 days and no more than 90 days.

Here’s a sample settlement letter I got for a client:

Settlement letter example of federal student loan with Missouri Department of Higher Education

What happens after you accept the offer

After you accept the offer and send in the payment, you wait for the payment to clear. From there, be on the look out for a satisfaction letter. That letter will come from either the collection agency or MDHE. The letter usually takes a couple of weeks to arrive.

The final thing you need to worry about is the tax consequence.  Because you will have settled the student loan for less than you owed, you may have to pay taxes on the amount that was forgiven. There are some ways to avoid this outcome. You should speak with a tax professional to discuss your options.

Final notes

Settling a federal student loan is possible. You just need to be in default and have access to several thousand dollars to make the settlement payment within 90 days.

You can get my help with this process. Send me a text or email me so we can get started.


  1. 20 USC  § 1082(a)(6) and 34 CFR § 30.70

  2. See SETC-Q1 of Loan Servicing and Collection – Frequently Asked Questions

  3. Letter from Jean Frohlicher, President of the National Council of Higher Education Loan Programs, Inc., to Robert W. Evans, Director of Policy and Program Deve., U.S. Department of Education (Nov. 7, 1993).

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