Student Loan Settlement Isnt a Get Out of Debt Free Card. Heres What to Know

The CARES Act federal student loan freeze has been extended to , but many borrowers will still find it difficult to resume payments despite the extra time to prepare. 18% of student loan borrowers were behind on their payments before the federal loan freeze went into effect, according to the Federal Reserve.

A survey by the Student Debt Crisis Center (SDCC) before the latest extension was announced revealed that among full-employed student loan borrowers, nearly one in five said that they would never be financially secure enough to resume payments again.

If you’re among those facing delinquency or default, it may be possible to settle your student loans for less than what you owe. However, while settlements do exist, they’re rare. And a student loan settlement may not actually be as beneficial as you’d expect.

Here’s what you need to know about student loan settlements and what other options you have for managing your student debt.

What Is a Student Loan Settlement and When Can It Happen?

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In a student loan settlement, you negotiate an offer to pay your lender a lump sum of money that is lower than what you currently owe in order to fully pay off your outstanding loans along with interest, late fees, and collection charges.

If your lender agrees, the loan is marked as satisfied once you make the payment and you no longer have to make payments toward your debt.

While student loan settlements may sound appealing, payday loans AR Betsy Mayotte, president and founder of The Institute of Student Loan Advisors, cautions borrowers. Most borrowers should expect to pay their loans in full as they agreed to when they signed the promissory note, she says. Essentially, the only good reason a lender might have to settle is if going through litigation might be more expensive than an actual settlement.

Pro Tip

A student loan settlement may not be realistic or even beneficial for your situation. Before exploring debt settlement, contact your lender to discuss alternative payment plan options to make your loans more manageable.

Adam Minsky, an attorney specializing in student loan law and contributor with the National Consumer Law Center, says that settlement can result in a favorable outcome – but only in very specific scenarios.

Usually, only borrowers who are in default on their student loans can potentially negotiate a settlement, Minsky says. And default can have very significant negative consequences for the borrower, as well as any cosigner.

Defaulting on your student loans is the first step in settling them, and doing so is a serious choice that should probably involve a debt settlement lawyer. Defaulting is considered a last resort because federal loan servicers can theoretically garnish your wages and take your tax refund to cover your nonpayment. With private loans, lenders also have the right to take you to court and sue you for your outstanding balances. At the very least, both federal and private lenders will send your account to collections and notify the credit bureaus, thus damaging your credit score.

Federal Student Loan Settlements

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Federal student loan settlements are put into two categories: standard or discretionary. The type of settlement you’re eligible for will affect your potential terms.

  • Principal + Interest: With this settlement, only your collections costs and fees are waived.
  • Principal + 50% Interest: If you are eligible for this form of settlement, the collection costs and fees will be waived, and you’ll only have to pay 50% of the interest that has accrued.
  • 90% (Principal + Interest): Under this settlement term, you pay 90% of the total interest and principal amount, and all collection costs and fees are waived.