In response to the Covid-19 pandemic, Congress has stepped in to help millions of student loan borrowers, but those efforts have not done enough to address the many students in default. At the end of March 2021, there were 5.3 million borrowers in default, according to Federal Student Aid. These borrowers owed $116.6 billion in combined student loans-roughly 7% of our nation’s $1.6 trillion in student loan debt.
In case you default on your student loans, there may be an option to settle your debt for a lower amount than you owe. It can be time-consuming and expensive, however, to negotiate student loan payoff terms. In this article, we’ll walk you through the process.
What Does Student Loan Settlement Mean?
Private student loan settlement is an effective way to reduce your debt and eliminate the need to pay back your student loans in the future.
The student loan settlement process is when the student negotiates a lump-sum payment with the loan servicer or collection agency. In exchange for the servicer or agency agreeing to the terms, you will pay a smaller amount than the loan amount, collection fees and interest you owe.
Upon following the settlement terms, your obligation for the loan is satisfied, and the loan will be marked as settled. While you will no longer have default status on your credit report, the settlement may still impact your credit in the future.
What are the terms of student loan settlement?
It is possible to negotiate a student loan payoff, but it depends on where your loans stand right now. You cannot settle your loans if they are in good standing, according to lenders. Defaulted student loans aren’t eligible forStudent Loans Settlement, says Adam Minsky, an attorney specializing in student loan law.
According to him, defaulted student loans are the only kind which can usually be settled or negotiated with. When you default, you may face serious consequences such as negative credit reports, litigation, collection fees, and penalties.
Settlement of Federal Student Loans
There are instances in which federal loans can be settled, but they are extremely rare. This is because federal student loans can be difficult to discharge in bankruptcy, and lenders can make aggressive efforts to collect payments.
A student who defaults on his or her federal student loans can be sent to collections, have his or her wages garnished, and even have their tax refunds seized if they’re at least 270 days behind on payments.
Servicers of federal loans have less incentive to negotiate with borrowers because they have multiple ways to recover their money.
Your debt will still have to be paid back in the majority, and you can only qualify under extenuating circumstances.
A defaulted federal student loan settlement is possible,” says Minsky. However, the amount of a balance reduction you can receive would be governed by federal rules. The result is that you may only be receiving a marginal benefit.
Private Student Loan Settlement
In the event of default, you may be able to negotiate a settlement with private student loans. It usually indicates that you have fallen 120 days behind on payments, but timelines may vary depending on your lender.
To decide if you can settle your student loan debt, you need to know that private student loan lenders may have more options to collect money owed as compared to federal loan servicers. The borrower’s legal dispute and the lender’s age of the debt also affect how the settlement is handled.