Negotiating Student Loan Payoff: How It Works
Falling behind on student loan payments can lead to a number of negative consequences, including frequent calls from debt collectors and damage to your credit. If you’ve defaulted on your student loans, it may be possible to negotiate a student loan settlement. While a settlement could be a time-consuming and costly process, if you’re able to settle your debt, it might be worth it. Here’s what you need to know about negotiating student loan payoff.
Is It Possible to Negotiate Student Loan Payoff?
The answer to the question of can you negotiate a student loan payoff? is yes. But approval is granted on a case-by-case basis. You’ll need to speak directly with a lender or debt collector, or hire a lawyer or debt settlement company to negotiate on your behalf. Lenders are only open to debt settlement if your student loans are in default. Federal loans are considered to be in default after 270 days of missed payments. Private student loan rules vary, but most private loans go into default after 90 or 120 days of non-payment. If the lender agrees to a student loan settlement, you may be able to pay back less than the amount you owe. The bill could still be considerable, however, and you may need to make a lump-sum payment upfront. If a student loan settlement is reached, the lender will mark your account as “paid in full.” While the default will be removed from your credit report, the settlement will still appear on your report and affect your credit for years to come.
How to Settle Your Student Loans
If you’re wondering, how long does it take to pay off student loans?, the process generally takes about two decades. The average student loan debt is more than $37,000, according to Educationdata.org, which could mean that the average student loan payment may be difficult for some borrowers to make. And that might result in negotiating student loan payoff.However, lenders may not agree to settle student loans unless you’ve exhausted other options for hardship assistance, such as income-driven repayment or loan rehabilitation. If your loans are in default, here are some steps you can take to pursue settlement. This could help you when it comes to paying off student loans fast.
Know Your Options
Before trying to negotiate a student loan payoff, take some time to research your options, especially the difference between settling federal and private student loans. Both types of settlements are possible, but federal student loan settlement may be rare. That’s because the government offers a variety of plans to get your student loans back into active status, including student loan rehabilitation and consolidation. What’s more, the government has wide-reaching powers of collections for defaulted student loans. If you haven’t been making payments, the government can garnish your wages, tax refund, and even Social Security benefits. If the debt collector is willing to negotiate a settlement, however, you might get the following three offers:
- Pay the full amount of your remaining principal balance and interest charges with the collections charges waived
- Pay the full amount of the remaining principal and half the interest charges
- Pay 90% of your current balance and interest charges
You may be able to negotiate a lower amount, but the Department of Education will have to approve your request. Private lenders, on the other hand, may be more flexible when it comes to negotiating a settlement, since they can’t garnish your wages or tax refunds. Some might accept a lump-sum payment of 35% to 75% of your remaining balance. The terms of your deal will depend on your remaining balance, collections charges and fees, and how long it’s been since you paid your loans.
Let the Lender Make the Initial Offer
Once you have a sense of your debt settlement options, it’s time to reach out to the lender or collections agency asking about a lump-sum payment in exchange for closing the account. It’s a good idea to let the lender make the initial offer. That way, you can see what the they want you to pay and negotiate from there. If you can’t afford the amount requested, ask the lender to present other options. Find out if they will accept a lower amount or can arrange an affordable monthly payment plan.
Provide Required Documentation
To successfully negotiate student loan payoff, you’ll need to prove that you can’t afford to pay back the amount you owe. Documentation will act as proof of your financial hardship. Gather any supporting records you have, such as:
- Medical records that explain why you’re unable to work
- Pay stubs or tax returns
- Rent or mortgage statements
- Childcare expenses
- Proof of other recurring expenses
Any financial records that would support your claim that you can’t pay back your student loans in full could help as you try to negotiate a debt settlement.
Ask for a Paid-In-Full Statement
When negotiating a settlement, you want to be 100% sure that your student loan account will be closed and you won’t be expected to make additional payments. Before you sign anything, make sure the lender agrees to provide a “paid-in-full” statement for your debt. Keep a copy of this statement on hand in case you get additional calls from debt collectors or the loan isn’t marked as closed on your credit report.
It’s important to note that you may have to make one more payment on your loans after settling them in the form of a tax bill. If the lender sends you a 1099-C form, that means you’ll likely be liable for taxes on the amount of debt that the lender canceled when accepting a payment for a lower amount.
Alternatives to a Student Loan Settlement
Student loan settlement is far from guaranteed. The process can be time-consuming and expensive, especially if you hire a student loan lawyer for help. Plus, a settled debt shows up on your credit report for seven years, acting as a red flag to future lenders. Before pursuing debt settlement, consider these alternative options for managing your student loans.
Deferment or Forbearance
The government offers deferment and forbearance programs to postpone payments temporarily. In fact, federal student loans have been in emergency forbearance since March of 2020 in response to the Covid-19 pandemic. Some private lenders also offer forbearance or deferment if you run into financial hardship. While interest may continue adding up, pausing payments could help you avoid default while you get back on your feet.
There are a number of forgiveness and loan repayment assistance programs at both the national and state level that could wipe away all or part of your student loans. Explore these options for student loan forgiveness to see if you qualify. If you’re able to switch jobs, some companies also offer student loan assistance benefits, including employer student loan repayment.
Income-Driven Repayment Plans
Federal student loans are eligible for income-driven repayment plans, including Pay As You Earn and Income-Based Repayment. These plans adjust your loan terms to a percentage of your discretionary income. Depending on your income, your monthly payments could be as low as $0, but your loans would still be in active status rather than in default. After 20 or 25 years of on-time payments, your balance would be forgiven.
Refinancing student loans is another option. When it comes to how to refinance your student loans, basically, you exchange your current loans for a new one from a private lender. Make sure to compare student loan refinance rates from multiple lenders to see if you can qualify for a better rate than you have now. Refinancing also typically lets you restructure your debt with new terms and an adjusted monthly payment. It’s important to note, however, that there are disadvantages of refinancing student loans. Refinancing federal loans turns them private, meaning your new loan would no longer be eligible for federal repayment plans, forgiveness programs, or rehabilitation. It wouldn’t be a good idea to refinance federal loans if you rely on any of these protections or suspect you might need them in the future.
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