Can You Settle Student Loan Debt?

Sarah Edwards | January 05, 2023

Edited by Hannah Locklear

Student loans can wreak serious havoc on your finances, especially if you don’t have the means to repay them. The monthly payment for a student loan can stretch into hundreds of dollars, impacting your disposable income and reducing your ability to afford an asset like a home.

Getting rid of student loans has traditionally been difficult. It’s next to impossible to eliminate them through bankruptcy, so most people are stuck with them until they repay them, no matter their financial circumstances.

Sometimes, people wonder whether they can settle their student loans like they can with a credit card or loan. While settling student loans is possible in some cases, it takes quite a lot of effort and may leave you with different results than you seek.

Let’s explore the potential for settling student loans and alternative options if settling won’t work.

Who can settle student loan debt?

If you have a traditional student loan through the Department of Education, you may be able to settle it. However, you’ll need to jump through a lot of hoops. The Department of Education has the power to stop the collection of student loans and can negotiate with you for a settlement.

Only some people will meet the requirements for a settlement. You’ll likely need to prove undue financial hardship and an inability to repay through traditional means.

In many cases, your lender will require you to default on your loan before they allow you to settle. Federal student loans default after 270 days of non-payment, while private student loans default between 90 and 120 days of non-payment.

A default on your student loans is a serious negative mark on your credit report. You’ll likely find it challenging to obtain a loan or mortgage after defaulting until the situation resolves.

If you intend to settle your student loans, you’ll need to make sure you have the money available to do so. Often, student loan balances run into tens of thousands of dollars. Even if you can reduce the balance of your loans by half, you may still owe $10,000 or more.

Usually, a settlement arrangement calls for a lump-sum payment to wipe the remaining record clean. Your efforts will fail if you don’t have enough money to settle.

Student loan servicers do not have to accept a settlement

Student loan servicers are under no obligation to accept your settlement offer. In most cases, there is little reason for them to do so. Student loan servicers have tremendous legal protections that allow them to sue you to force you to repay your debts.

Even if you begin the settlement negotiation process by defaulting on your loan, the servicer does not have to accept your offer. If the loan servicer does, it may only entertain offers as high as 90% of the total value of your debt, which may result in very little savings to you despite all of your efforts.

Settling your student loans may impact your credit score

Settling your student loan will not benefit your credit score. When you default on paying your loan, your credit score will likely fall hard, fast. If you manage to negotiate a settlement, your lender will probably report you failed to abide by the terms of the agreement or that you paid less than the total value of your loan.

Following the settlement, you can build your credit score back up, but it will take time. You will likely find it challenging to obtain a credit card, buy a home, or purchase a car with a loan.

Start the process of settling my student loan

If you want to settle your student debt, try using these steps:

1. Determine if you want to settle with a lump-sum payment or monthly installments.
2. Calculate how much you can afford to pay off.
3. Contact the debt collectors and make an offer.
4. Negotiate a settlement.
5. Get the debt settlement agreement in writing.

Let’s break down these steps a little further.

1. Determine if you want to settle with a lump-sum payment or monthly installments

If you’re determined to settle your student loan for less than you owe, figure out what you can afford to pay in a lump-sum payment arrangement. By offering a lump-sum payment, you’re agreeing to pay off the debt in one payment, usually at a percentage of the original amount.

If, on the other hand, you cannot afford a lump-sum payment at the time, consider setting up a new, monthly payment structure. Your settlement agreement will involve monthly installments that last for several months or years until the balance is paid, usually in full.

Both of these methods work, and most debt collectors are willing to accept either type of settlement.

2. Calculate how much you can afford to pay off

Once you’ve decided which type of settlement you’re aiming to reach, calculate how much money you can actually afford to pay off in a lump-sum payment or monthly installments.

You’ll want to look over your finances carefully and budget it out. If you do not fulfill your settlement agreement because you cannot afford it, bigger issues can arise like a debt lawsuit.

3. Contact the debt collectors and make an offer

We advise starting with at least 60% of the value of your loan. However, don’t be surprised if your creditor requests more.

Allow your student loan to go into default. Once it does, send your student loan provider (or debt collector) a settlement offer stating something like:

“I currently owe [$___] for [account number]. I don’t have that kind of money to pay off the loan currently. But I do have [$___] that I can pay within 30 days to settle the debt in full. If you accept, please respond to this message with a settlement agreement. If you would like to counter, please reply with your counteroffer amount.”

4. Negotiate a settlement

Wait and see how your student loan provider chooses to respond. Chances are high that they will come back with a counteroffer. You may go through several rounds of negotiation before you reach an agreement.

Most importantly, don’t accept an offer that you know you cannot afford. This will only make matters worse.

5. Get the debt settlement agreement in writing

If your student loan provider offers you an agreement you can afford to pay, get it in writing before transferring the money to settle your loan.

You’ll want to ensure you fulfill your end of the agreement entirely. If you don’t, the student loan provider may decide to cancel the contract, putting you at risk of legal action.

Loan service providers and debt collectors will usually draft the settlement agreement for you, so just make sure to review it carefully before signing. Here’s a debt settlement agreement example.

For more tips on how to settle a debt, check out this video:

What are the alternatives to settling my student loan debt?

There are a few options to alleviate your student loans if you look into them.

An income-driven repayment plan is the first alternative available to many student loan holders. Under an income-driven repayment plan, you make payments based on your annual earnings and family size. In many situations, an income-driven repayment plan can significantly reduce your monthly repayments to an affordable amount.

You can also consider a student loan discharge. Some consumers find a discharge to be an option in some instances, like if the college they attended closed before they could complete a degree program or if they suffer from a total and permanent disability.

You may obtain public service loan forgiveness if you work for a government agency or nonprofit. To qualify, you’ll need to make at least 120 payments before the servicer forgives your loans.

Finally, you can consider refinancing your loan. Refinancing can lower your interest rate, allowing more of your monthly payment toward your loan's principal rather than interest and fees. However, if you refinance your loan with a provider outside the government, you may lose certain benefits, like consideration for an income-driven repayment plan.

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