How To Negotiate a Student Loan Debt Settlement

If you're struggling to keep up with your student loan payments, you're not alone. About 63% of student borrowers have reported difficulty making their payments, according to a 2023-24 survey by the Consumer Financial Protection Bureau. For those in severe financial hardship, a student loan debt settlement might offer a way out. But negotiating a settlement isn't easy. Lenders have the final say on whether to accept less than what you owe and how much they're willing to settle for.

In this guide, learn how student loan debt settlements work, pros and cons to consider, and tips to negotiate successfully.

What is a student loan debt settlement?

Student loan debt settlement is when you negotiate with your lender to pay a lump sum that's less than the full amount you owe to resolve your outstanding debt. After a successful negotiation, you'll have a specific timeframe to make the agreed-upon payment. In most cases, your loan must be in default before a lender will consider a debt settlement.

Can I settle my federal student loan debt

Debt settlement is less common with federal student loans.

“The Department of Education has many collection powers available to them, such as offsetting tax refunds or even garnishing wages, so settlement is generally not an option,” says Leslie Tayne, founder of Tayne Law Group, a debt solutions law firm.

When a federal student debt settlement is possible, it's called a compromise. The Department of Education has specific rules for loan servicers and collection agencies offering compromises. A compromise can only be considered after pursuing all other collection methods. And, your loans must be in default before a compromise is an option.

If the loan servicer decides your situation warrants a compromise, the standard compromise options include:

• Paying the current principal and interest, which waives any fees.
• Paying at least half of the current principal and half the interest.
• Paying at least 90% of the current principal and interest balance.

Although discretionary compromises are an option, these are less common.

Can I settle private student loan debt?

Settling private student loans is often more flexible than federal loans, as private lenders have greater discretion to negotiate. However, lenders are still focused on recovering as much of the debt as possible, which can make settlements challenging.

Private lenders typically won't consider a settlement unless your loan is in default or has been charged off. In these cases, the debt may be transferred to a collection agency, which then becomes responsible for negotiating the settlement. Collection agencies may accept smaller amounts than the original lender, but you should always get the terms in writing before agreeing to anything.

Current student loan refinance rates

Pros and cons of settling student loan debt

Every financial transaction has advantages and disadvantages to keep in mind. Here's a look at both sides of settling your student loan debt.

Settling your student loans can feel like a relief, especially if payments have become unmanageable. It offers the chance to resolve the debt quickly, potentially for less than you owe, and remove the financial strain from your life.

However, settling student loan debt comes with significant drawbacks. The forgiven portion of your loan may be considered taxable income, which could increase your tax bill. Settlements also may require a large lump-sum payment within a short timeframe, and the savings might not be as substantial as you expect.

Even after resolving the debt, a settlement can harm your credit score. Lenders may view it as a sign that you didn't meet your repayment obligations, which could make borrowing more difficult in the future.

Steps to negotiate a debt settlement

If you want to pursue a student loan debt settlement, use the steps below as a guide:

• Assess your loan status. Remember, in most cases your loans must be in default before you can pursue a debt settlement.
• Assess your financial situation. Generally, a debt settlement involves paying a lump sum for less than you owe within a shorter timeframe. If you don't have savings available, or the ability to raise funds quickly, a debt settlement might not be ideal.
• Gather documents of your financial situation. You'll often need to prove that your financial situation is undergoing hardship. Bank statements and tax returns may bolster your case.
• Consider consulting an attorney. Although you can go it alone, working with an attorney can help you navigate the process more smoothly. If you're confident with your numbers and the process, you can skip this step.
• Contact your loan servicer or lender. Getting in touch with your lender can kickstart the negotiation process for student loan debt settlement. Be prepared to explain why you are seeking a settlement, including why you aren't able to pay back the loan as previously intended.
• Offer a settlement amount. At some point, you'll offer a settlement amount. From there, the lender may go back and forth with you to come to an arrangement.

Tips for a successful negotiation

Approaching a student loan settlement requires careful preparation and professionalism.

“If you're planning on negotiating a settlement on your own, it's important to maintain professionalism with the lender and it's advisable to promptly respond to communications from them,” says Tayne.

Enter the negotiation well prepared by gathering your financial documents and figuring out what your total income and expenses are so you can determine how much you can realistically offer as a settlement, Tayne advises. She also stresses the importance of being patient and persistent if you have trouble agreeing on an amount that works.

“Stay calm, and don't give up,” Tayne says. “You can always try again when you are in a better headspace or reach out to a professional for help.”

If you aren't making headway, Brandon Ashton, director of retirement security at Cornerstone Financial Services in Southfield, Michigan, suggests seeking out another strategy.

“Consider legal counsel, as an attorney specializing in student loan debt can provide valuable guidance and representation,” Ashton says. “They can help you navigate the complex legal and financial aspects of debt settlement and ensure your rights are protected.”

Alternative strategies for managing your debt

Student loan debt settlement isn't always the right strategy for your financial situation. If you don't think debt settlement is a good option for you, consider the alternatives below.

Income-driven repayment (IDR) plans

If you can't keep up with your federal student loan payments, switching to an IDR plan can help.

“These plans can adjust your monthly payments based on your income making them more manageable,” says Ashton. Some income-driven repayment plans also come with embedded loan forgiveness after a specific timeframe.

Learn more: Guide to Income-Driven Repayment (IDR) Plans

Seek out loan forgiveness

Borrowers with federal student loans can pursue loan forgiveness opportunities, like the Public Service Loan Forgiveness or Teacher Loan Forgiveness programs. Although it may take years, you could clear away your debts without paying back the full balance.

Learn more: The Complete List of Student Loan Forgiveness Programs

Deferment or forbearance

Deferment and forbearance are options some lenders offer that let you temporarily pause your student loan payments.

“Look into deferment or forbearance if you are experiencing financial hardship and think you might default on your loans,” says Tayne, founder of Tayne Law Group, a debt solutions law firm.

Tayne continues, “Your best bet is to contact your student loan servicer and ask what options are available and if you'll have to pay interest or fees by essentially pausing your student loan payments.”

Learn more: Can't Pay Your Student Loans? Here's What To Do

Refinance private student loans

If you have private student loans, consider refinancing them to lock in a more affordable monthly payment. To reduce your monthly payments, seek out a loan with a lower interest rate or longer loan term attached.