Should You Settle Your Student Debt?
You cannot discharge student loans in bankruptcy. But most people don’t realize that you can sometimes settle your debt with the US Department of Education—for less than the total amount owed. A settlement involves paying off your debt in full—usually within 90 days of the settlement offer. In some cases, the Department of Education will let you pay in installments, but usually you still have to pay the full obligation of your debt within the same fiscal year. Here are a few things you should know before attempting to negotiate a settlement.
Check your lender’s calculations
Your lender will tell you the total amount owed, including interest. But mistakes that increase the amount by small increments are common. The most common areas for these “mistakes” include errors in interest calculations and collection fees. The collection fee should be a percentage of the principal and interest that remains unpaid, without factoring in penalties and late fees. There may be mistakes in recording the amount of federal offsets as well as wage garnishment records. Be sure to check everything carefully, as small mistakes can add up.
Know what you can and cannot get
You will be ineligible for a loan settlement agreement if your account has been involved in a case of fraud. In addition, the Department of Education will not settle the debt for less than the default claim paid for a FFELP loan—or the remaining principal balance for a Direct loan. Most settlements represent larger amounts; the US Department of Education usually doesn’t let the settlement amount drop below 115% or so.
Know how much are or could be paying through wage garnishment
The Department of Education takes into account your monthly income—and how much they have been taking by garnishing your wages and income tax refunds. Ideally, they will want you to pay as much in settlement as you possibly could based on all future payments based on your income. Ideally, to get the full amount of your loan reduced, you would be able to argue that you’ll never be able to pay back the full amount even with income tax refund and wage garnishment.
Know what collections agencies are allowed to do
Collections agencies used by the government to collect on federal loans can accept three types of settlements without getting approval from the US Department of Education. They can waive your collection charges, requiring you to pay only the balance and accrued interest; they can cut your accrued interest in half and have you pay the full principal plus half the interest; or they can demand at least 90% of the full principal and accrued interest.
Usually, if you want a better deal than these, the collections agency has to get permission from the Department of Education. However, they can offer at most six compromises to a small amount of borrowers each quarter. The collections agency has to offer it, however—you can’t argue for it—and these are extremely rare and given out only in the most unusual circumstances.
Get your settlement agreement in writing
Be sure the document states that this agreement settles all debts in full, and have an attorney look it over. Collections agencies have led borrowers to think they were settling their debts in full in the past, only to apply the payments to the debt without canceling it out. Look for a “paid in full” statement from the lender.
There are no guarantees that you will be able to settle your debt from a traditional or accredited online college. But if you are struggling with your student loans, it can be worthwhile to ask. Know where you stand in the negotiation process and what the collections agency and the Department of Education can and cannot do, and you will have an easier time negotiating some relief on your student loans.
More About Understanding Student Loans
- Credit Repair Services You Should Never Pay For
- Questions You Should Ask Before Applying for Student Loan Forbearance
- The Bank on Students Act: What It Is, and How It Could Help Student Borrowers
- How the Death of a Co-Signer Can Affect Your Student Loan
- Peer-to-Peer Student Loans: What They Are, and How They Can Help You Pay for College
- If You're Unable to Work Because of a Disability: What Happens to Your Student Loan?
- New Rules for Debt Collectors: How They Could Affect Your Student Loan
- Having Trouble Repaying Loans? The Department of Education May Be in Touch