Student loans are a substantial financial burden for millions of Americans. If you are struggling to pay back your student loans, you may be curious about negotiating your loan debt. Whether you need to negotiate repayment terms or the amount itself, negotiating your student loans is possible. Keep reading to learn more about negotiating both federal and private student loans.
The Student Loan Debt Settlement Process
Debt settlement is the process of talking to your lenders and agreeing to a lump sum payment for the debt. Usually, this amount will be less than the original balance. So why would a lender agree to debt settlement? Well, in most cases, debt settlement is the last option for borrowers, so instead of a lender losing all the money they gave out, they would rather settle for at least something back.
If you want to try and pursue student loan settlement; here is what you will need to do:
Step 1: Gather Documents You Need
The first step you need to take is gathering the documents you need to show why you may be struggling to pay your federal loans or private loans:
Show Your Income
Most of the time, student loan borrowers do not pay their debts because they just do not have enough money to do so. And so, if you are trying to settle student loan debt, provide proof of income. You can use documents like paystubs, bank statements, and tax returns to show your lender that debt settlement is your only option.
Health Records and Bills
Certain medical conditions can make it difficult to hold a steady job and impossible for standard student loan payoff. If you have been diagnosed with any physical or mental illness that makes it hard to keep income and pay your loan servicer, you can negotiate. And so, gather your medical records and show them when asking for a reduction in student loan debt.
Records for Significant Life Events
Sometimes your life can change, and those changes can impact your financial situation. For example, if you get guardianship of a minor or if there is a death in your household that decreases income, it can completely change your finances. If this is the case, provide your lender with the corresponding records to settle student loans.
A Personal Statement
A personal statement along with records can be a great way to explain your situation when settling student loan debt. Let your lender know your standing in your own words and explain why you need a lump sum payment option for your student loans.
Step 2: Contact Your Lender or Collection Agency
The next step is notifying the right place. If your student loans have been delinquent for a long time, chances are your lender has passed them to a debt collector. Once you know where your debt is, you can begin the negotiation process. Emails are usually the best way to get started, and then you may want to continue the process over the phone.
Step 3: Negotiate Your Student Loan Debt
The last part of the process is figuring out what kind of plan your lender or collection agency is willing to work with. In general, there are 4 settlement options out there for federal student loans that may be possible for private loan options as well:
- Principal and Interest Without Collection costs — One option is paying the remaining principal amount with interest rates but waiving any collection costs. Collection costs can be thousands of dollars depending on a few factors, so you could be off the hook for a significant amount.
- Paying Principal and Only 50% Interest — Another option for student loan settlement is paying the principal and only half of the interest rate due.
- Paying 90% Of the Principal Plus All Interest — Paying a majority of your principal and all of the interest may also be negotiable.
- A Discretionary Compromise — A discretionary compromise is paying less than the options above. Private student loans may sometimes have more flexibility with various settlement options.
Step 4: Review Your Settlement Agreement
Once you reach a settlement agreement with your lender, you should carefully review the terms and conditions before signing any paperwork or making a verbal agreement. The whole point of the settlement process is to ensure that you can continue making payments or pay a certain amount upfront. And so, make sure that your new loan repayment terms are manageable for your budget.
Step 5: Start Repaying
Once everything is signed, depending on the terms you may have agreed to, there may be a one-time or multiple payments for the loan. Either way, ensure that you stay in good standing after negotiating debt by making payment(s) on time.
So, Can I Negotiate to Settle My Student Loan Debt?
In most cases, your loan has to be in a state of default or several missed payments for a lender to talk about debt settlement. Most lenders will not be open to settling a good-standing loan account. However, most people thinking of settling usually do so because they are having trouble repaying their loans.
Federal Student Loans
In most cases, it is difficult to get federal student loan settlements for subsidized and unsubsidized loan options. This is because federal student loan services have several ways to recoup funds, and this type of debt does not go away even after bankruptcy. However, due to this, they may be much more flexible with a repayment plan. So, definitely talk to them about some kind of negotiation, even if they don’t go for a settlement.
Private Student Loans
Private student loan lenders can be anyone outside of the federal government. Many students use options like online lenders explicitly focusing on student loans, personal loans from banks or credit unions, and sometimes even smaller loan options like a payday loan online or a low-limit credit card. Regardless of the loan type you used for your education, debt settlement may be a real possibility if you are having trouble making your monthly payments.
Some Cons of Student Loan Settlement
Debt settlement can definitely help many people, but there are some cons to think about with the process:
You May Require a Large Amount of Money Upfront
Depending on what your lender agrees to, to settle student loans, you may need a large amount of money upfront. Sometimes thousands of dollars, depending on the amount of outstanding debt you have. Not everyone has access to this kind of money, so debt settlement may not work.
Your Debt Amount May Not Change Much
Although debt settlement for student loans can definitely lower the amount you owe, it may not mean a significant change. For many people going down a few thousand dollars on several thousands, still means the debt is unaffordable.
Debt Settlement Can Hurt Your Credit
With student loan settlement, the accounts will be listed on your credit report as “settled.” This can stay on your credit for up to seven years. Sometimes lenders will avoid giving out money to applicants with these types of accounts listed on their credit history.
What About Student Loan Forgiveness?
Student loan forgiveness is something you can apply for with federal student loans. It essentially means your federal student loans are waived. If you do decide to apply, make sure to do so through federal websites, as there are many student loan forgiveness scams out there. Here are some common scenarios in which you may qualify:
Teacher Loan Forgiveness
If you teach for five consecutive years, you may be eligible for up to $17,500. Forgiveness will depend on a few factors, including the school in which you teach at.
The Public Service Loan Forgiveness (PSLF) Program forgives debt for people who work at non-profits or government agencies. However, this program only kicks in after you have made 120 payments on your repayment plan.
Closed School Discharge
If the college or university closed while you were enrolled in school or soon after, you may be eligible for some student loans to be discharged.
Total and Permanent Disability Discharge
Your student loans may be discharged if you face permanent disability due to a mental or physical condition.
Perkins Loan Cancellation
Based on your occupation and hours of service work, you may be eligible for Perkin Loan forgiveness.
Your loans may be discharged if someone fraudulently took your information and signed up for federal aid in your name.
Other Ways To Lower Monthly Minimums With Student Loans
Other than debt settlement and Loan forgiveness, you may have some options that can help lower your monthly payment amount on your student loans:
Income Driven Repayment Plans
With federal student loans, you can sign up for an income driven repayment plan. This can significantly lower your monthly minimum payment and make repayment actually affordable.
Refinancing or Consolidating Your Student Loans
You can consider consolidating or refinancing your student loans. With consolidation, you take out one large loan to pay off multiple debts. That way, you only have to worry about one monthly payment. While refinancing is usually only for one loan at a time. The goal for both is to get a better interest rate and more manageable repayment terms. Your options will be based on your income and credit history, but adding a cosigner or borrower may help you access various options.
Focus On Debt Payoff
Many people feel trapped in debt because of the sheer amount they have to pay, especially when it comes to student loans that can be hundreds of thousands of dollars. However, different debt repayment strategies may be able to help you gain control of your situation.
And so, research and see what works best for your budget. For example, those with large incomes and little expenses may be able to put thousands of dollars toward debt payoff. While those with a more modest income can really focus on making more than the minimum payment and learning to be okay with staying in debt for a while. It’s all about being realistic but taking an active approach to debt payoff.
Bankruptcy With Private Student Loans
For many people, bankruptcy is a last resort when they are drowning in debt and cannot repay it. If you file for Chapter 7 bankruptcy, your private loan debt will be discharged. While Chapter 13 can help you negotiate debt with your private student loan lenders.
But, as mentioned earlier, federal student loans do not go away with either bankruptcy type. Another thing to think about is your credit. Chapter 7 and 13 will devastate your credit score, which is why many people go to debt negotiation, refinancing, and other options before pursuing bankruptcy.