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.
Forgiveness
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
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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This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. These links are provided for informational purposes and should not be viewed as an endorsement. No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this content.
Communication of SoFi Wealth LLC an SEC Registered Investment Advisor
SoFi isn’t recommending and is not affiliated with the brands or companies displayed. Brands displayed neither endorse or sponsor this article. Third party trademarks and service marks referenced are property of their respective owners.
Communication of SoFi Wealth LLC an SEC Registered Investment Adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at www.adviserinfo.sec.gov. Liz Young is a Registered Representative of SoFi Securities and Investment Advisor Representative of SoFi Wealth. Her ADV 2B is available at www.sofi.com/legal/adv.
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7 budgeting secrets to help you pay off debt
There’s no shortage of debt in America. Total household debt reached $11.67 trillion in September 2022. But no matter how large or small your balance may be, budgeting to pay off debt of any kind can set you up for a stronger financial future.
In this article you’ll learn how to budget to pay off debt as well as soak up some smart tips for lowering your balances. Whether you have maxed-out credit cards, a high-interest auto loan, student loans, or any other type of outstanding debt, you’ll be ready to tackle them all.
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Lowering your debt is an admirable goal. But in order to achieve it, you need a plan. And the best type of planning to pay off debt is creating a budget and sticking to it.
What exactly is a budget? It’s a way to track your income and expenses, so you know exactly what you’re spending and where.
By understanding these numbers, you can make decisions about what areas to scale back in spending in order to put your money toward other things—like paying off your debt.
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How to pay off debt? Here are seven strategies that will make a big difference.
In order to budget to pay off debt, you need a clear understanding of how much money you actually have to work with. If you have a job, take a look at your paystub (and your partner’s, if you share finances) to see your take-home pay.
Take-home pay isn’t your salary divided by 12 months. It’s actually less than that; it’s the amount of money going into your bank account after deductions like taxes, health insurance premiums, and 401(k) contributions.
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Next, calculate all of your current fixed expenses each month — these are the costs that don’t vary:
- Rent or mortgage
- Car payment
- Cell phone bill
- Streaming services
- Child care
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Your next task is to pull out your recent bank and credit card statements to find out how much you’re spending on non-fixed expenses. These things still might be necessary (like gas and groceries), but you have control over how much you actually spend.
It might be uncomfortable to categorize every single transaction from the last month, but it’s an important step in creating a budget for paying off debt. Some ideas for categories: food, shopping, health/wellness, travel, and gas.
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With all of your spending habits identified, it’s time to identify where you can scale back. Perhaps you can cancel some streaming subscriptions or pick a cheaper cell phone plan. There’s almost always room to remove something from your budget, which gives you more cash to put toward extra debt payments.
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You can scale back on both essentials and non-essentials, or a combination of both. Set monthly spending limits in each area so you can still enjoy the things you love, but with an awareness of the cost. For instance, give yourself a weekly grocery budget instead of browsing through the aisles without a set plan.
Another strategy is to create a spending alert on your banking app that notifies you when you’re close to a certain dollar amount at a certain retailer or category, like Amazon or restaurants.
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Once you have a sense of your current spending and areas where you can scale back, it’s time to create a debt pay-off plan. Choose how much extra money you want to put toward your debt balances each month. You can start off small as you create new spending habits, or make an aggressive plan if you’re ready for change. The idea is to find a balance that lasts over time, rather than fizzling out after a few short weeks.
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If you know how much extra you can reasonably pay on your debt, automate those extra payments to correspond with your paycheck. That way you’ve already made the additional payment before you start spending in other areas, like eating out or shopping.
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Using a budget is an essential part of reaching any financing goal, whether it’s paying off debt early or saving up for a large purchase. It also helps you prepare for the future by creating savings opportunities for emergencies and retirement. That can lead to great confidence that you can weather life’s ups and downs.
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If you have outstanding debt as well as some money in a savings account, you may wonder if you should simply use that cash to put a dent in your balances. In reality, it’s smart to have certain savings goals funded before using any leftover funds for your debt.
For instance, most financial experts recommend having anywhere from three to nine months’ worth of expenses tucked away in case you lose your job. Additionally, you should do your best to regularly contribute to your retirement fund so that you can ideally benefit from long-term growth.
Here are five other ways to pay off debt.
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Consolidating your debt refers to taking multiple outstanding balances (usually credit cards) and paying them off with a single debt consolidation loan. Then you just have one monthly payment to worry about. And in an ideal scenario, you could qualify for a lower interest rate that saves you money.
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Another option for credit card debt is to do a balance transfer. That entails opening a new credit card and rolling other balances onto that new account. Oftentimes, there is a fee associated with this strategy, usually charged as a percentage of your debt and added to your balance.
On the plus side, some balance transfer credit cards offer a low or even 0% introductory APR, so you essentially put a pause on making interest payments as long as you make at least the minimum payment on time each month.
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You can also apply to refinance a loan in order to secure a lower interest rate. You can also adjust the term to stretch out monthly payments over a longer period of time; while that might lower how much you pay each month, just remember that it usually means you pay more in interest over time. Student loans, mortgages, auto loans, and personal loans can all be refinanced to adjust your loan terms. Just watch for costs like origination fees that can diminish the benefits of refinancing.
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There are two successful ways to stay motivated while paying down debt. The first is to identify your smallest balance and throw all your extra payments at that one (while still making minimum payments on your other balances). Experiencing that first success could deliver the inspiration you need to keep going.
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Another common debt payoff strategy is to pay off the highest interest rate first. After all, that’s the bill that’s accumulating the most interest. Choosing this bill as your target for extra payments can save you the most money over time.
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- Checking accounts are ideal for everyday transactions but earn little or no interest. Savings accounts are better for storing and growing your money — they earn higher interest but often restrict how many withdrawals you can make per month.
- An emergency fund is a key financial safety net. Aim to have three- to six-months worth of living expenses tucked away in a separate account that earns interest, but allows you to access the money if needed (such as a high-yield savings account). In some situations, it may be appropriate to have up to 12 months of living expenses saved.
- To get into the savings habit, consider having 10% of your paycheck directly deposited into your savings account. Or, set up a small automatic recurring transfer from your checking account into your savings account on the same day each month.
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Creating a budget for paying off debt is a move impossible to regret. You’ll feel more in control of your finances, and once those balances are gone, you’ll have cash flow ready to boost your other savings goals.
Learn More:
This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
Please understand that this information provided is general in nature and shouldn’t be construed as a recommendation or solicitation of any products offered by SoFi’s affiliates and subsidiaries. In addition, this information is by no means meant to provide investment or financial advice, nor is it intended to serve as the basis for any investment decision or recommendation to buy or sell any asset. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. These links are provided for informational purposes and should not be viewed as an endorsement. No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this content.
Communication of SoFi Wealth LLC an SEC Registered Investment Advisor
SoFi isn’t recommending and is not affiliated with the brands or companies displayed. Brands displayed neither endorse or sponsor this article. Third party trademarks and service marks referenced are property of their respective owners.
Communication of SoFi Wealth LLC an SEC Registered Investment Adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at www.adviserinfo.sec.gov. Liz Young is a Registered Representative of SoFi Securities and Investment Advisor Representative of SoFi Wealth. Her ADV 2B is available at www.sofi.com/legal/adv.
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