Negotiating a student loan payoff allows you to settle your debt for less than the amount you currently owe. There’s one catch: you have to fall behind on payments and damage your credit score before settlement becomes an option.

Student loan settlement is possible, but a settlement for pennies is unlikely. Depending on whether you’re looking to negotiate a payoff for federal student loans or private student loans, you’re going to need a significant amount of cash for a lump sum settlement or enough money to make monthly payments over a short period of time.

In this post, I’ll cover what to know before negotiating a student loan debt settlement, as well as some alternatives if it doesn’t make sense for you.

Disclaimer: Although I am a student loan lawyer, this article contains general information and should not be taken as legal advice. If you want legal advice that pertains to your specific situation, you should schedule a free 10-minute consultation with me.

What is a student loan settlement?

A student loan settlement is when the loan holder agrees to accept less money than you currently owe after you’ve missed payments for several months.

• Lump sum settlement – you make one large payment to settle your student loan debt for less than the current balance. You usually get the biggest discount with this type of settlement agreement.
• Monthly payment – you agree to make payments over Indiana title loans several months up to a handful of years. If you miss a payment, the settlement offer is cancelled and you owe the full amount.
• Lump sum plus monthly payment – you make an initial lump sum payment and then make payments until the reduced balance is paid in full.

Most federal student loan settlements are for a lump sum because you typically have to pay the settlement amount in three months or less. The type of settlement you’re able to negotiate for a private student loan depends on the collection agency, the loan holder, the age of the loan, the loan balance, etc.

You can negotiate a lower payoff amount on a student loan, but your account has to be in default or charge off status. If you’re still making monthly payments or are in deferment, forbearance, or past due but not in default, settling student loan debt will be impossible.

Calling your loan servicer and asking for a discount if you immediately pay your student loan debt in full won’t work. A student loan is an investment. The longer you take to pay it back, the more interest accrues, and the more money goes to the investors (the Department of Education or private companies) that own your loans.

• Will private student loans settle for less? Borrowers may be able to settle private student loans after the loan defaults or is charged off.
• Can federal student loans be settled? Federal student loan settlements are possible if the loan is in default and has been moved from the loan servicer to a collection agency. Federal law allows Direct Loans, FFEL Loans, and Perkins Loans to be settled, also called compromised, for less than the full amount.

Can you settle student loans in good standing?

You cannot settle federal student loans or private student loans that are in good standing. With both federal and private loans, a student loan settlement doesn’t become an option until you enter loan default – and that can take up to 270 days.

Of course, if you have good credit, the last thing you want is to have late payments reported to the credit bureaus – especially if you have a cosigner. But unfortunately, lenders aren’t willing to get rid of the accrued interest or collection charges if your loan is in good standing. From their perspective, it doesn’t make business sense to offer a discount for you to pay your loans early. The lender makes its money by collecting on the interest you pay each month. The longer you take to repay, the more money your lender makes.