Those guidelines don’t exist with private student loans.
A private student loan settlement can be for a lump sum, fixed monthly payments, or a combination of both.
As for time, the settlement can stretch over several months. (24-36 months is typical.)
5. Trust Your Gut If the Loan Settlement Offer Seems Unbelievable
Wondering if the deal you got from a debt collection company is too good to be true?
Your gut might be trying to tell you something.
Every now and then, I’ve seen debt collectors send letters offering to settle the principal balance less collection charges for 10 cents on the dollar.
On the surface, that sounds awesome.
But when you look closely at the loan, what you’ll likely see is that the loan is past the statute of limitations.
In effect, the creditor is offering you to settle a student loan you’re no longer legally obligated to pay.
Of course, every situation is different. And it’s totally possible you’re getting an awesome deal for a debt you’re still obligated to pay. But in my experience, you better read the fine print before you agree to pay anything.
6. Federal Student Loan Settlement Options Suck
Here’s the deal:
The US Department of Education’s guidelines makes it impossible for most student loan borrowers to settle their student debt.
The Department of Education offers 3 standard settlements:
Option #1: Pay your current principal balance, plus any accrued unpaid interest. Collection charges and fees are waived
Option #2: Pay the total principal with half of your interest balance (the other 50% is forgiven)
Option #3: Pay 90% of the total principal and balance owed (10% discounted)
7. How to Find out if Your Loans Are Federal or Private
The easiest way to check what type of student loans you have is to view your loans with the National Student Loan Data System. That system has all your federal student loans. If you can’t log in, another option is to call the Federal Student Aid Information Center at 800-433-3243. They’ll be able to give you information about all your federal loans. Compare that information against your credit report. Any student loan on your credit report you haven’t already identified as a federal loan is likely a private loan.
Few Americans have tens of thousands in their bank account. And if they do, it’s usually in a 401k or some other retirement vehicle. And that money, in my opinion, is better kept in a retirement account rather than trying to settle defaulted loans.
The federal government simply has too many flexible repayment plans like income-based repayment or Revised Pay As You Earn to keep your monthly payments low while you contribute as much as you can towards retirement.
Sometimes you’ll pay 60 cents on the dollar. Other times you’ll pay closer to 30 cents.
About Strategic Default
I get it. It’s frustrating to make payments for years only to watch your balance grow. At that point, it makes sense to entertain a strategic default to get an affordable settlement agreement. But the problem with that strategy is that it’s arguably fraud (that’s for a judge to decide) and it can damage your personal finances by ruining your credit report and leaving you exposed to wage garnishment and having your income tax refund and Social Security benefits offset. And it also makes you ineligible for student loan forgiveness programs like Public Service Loan Forgiveness.
What your settlement will look like, if you settle, depends on a number of factors, including:
Whether you have a cosigner
Your credit score
Whether you’re disabled
Your last date of payment
Who the private lender is
Basically, there’s really no way to predict what your settlement will look like. You just have to negotiate your way to the best deal.
8. Impact of Student Loan Settlement on Credit Score
The thing about student loan settlements is that they come at a cost:
Your credit score will take a hit.
You’ll rarely negotiate a settlement unless you fall behind on your loan payments and end up in default.
And if that happens, your credit score will take a hit from the late payment history and the default status marked on your trade line.
Negotiating a settlement may not help remove that negative information.
Sure, you can always ask the loan be marked paid in full or the late payment history is deleted, but that rarely happens.
More often than not, I find asking for “pay for delete” simply slows negotiations.
The better move is to negotiate the settlement, pay off the loan, and then work with a credit repair professional to remove the negative information.