Can you negotiate a student loan payoff?

If you’ve defaulted on your student loans, you may be able to negotiate a payoff with the collections agency or loan provider

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In some cases, you can negotiate a student loan payoff if you’ve defaulted on your payments — but it’s not an option for every borrower. (Shutterstock)

If you miss a student loan payment or make a late payment, your student loan account will be considered delinquent. If the delinquency continues for a certain period of time — usually 270 days for federal student loans and 120 days for private student loans — your loans will go into default, which can severely affect your credit.

If your student loans have entered default status, or are at risk of going into default, you may be able to negotiate a settlement with your loan holder. Here’s how to negotiate a student loan payoff, when you might be able to settle your student loans, and why this option could save you money.

If you’re having trouble keeping up with your student loan payments, refinancing may help you get a lower interest rate or more manageable payments. You can visit Credible to see your prequalified student loan refinance rates for private student loans.

What is student loan settlement?

Student loan settlement is when you negotiate a settlement with your student loan provider, sometimes for an amount less than you currently owe. These negotiations usually take place after your loan standing has devolved from a state of delinquency to a state of default (or in some cases, is nearing default).

If the negotiations lead to an accepted settlement, you’ll agree to pay off a set amount either in one lump sum on a specified date or through a short-term payment plan. 

Can you negotiate a student loan payoff?

It may be possible to negotiate a student loan payoff, depending on the type of loan — federal or private — the lender or collection agency, and your loan status. Even if you’re suddenly thrust into a financial crisis, you can’t qualify for a student loan settlement if your loans are still in good standing. 

Keep in mind, if negotiating student loan debt is an option with your loan holder or collections agency, you should only consider it as a last resort. Although you’re technically paying off your student loans, a student loan settlement isn’t without its penalties. You may have to pay additional fees when you settle your student loans. And if a collections agency is involved, this decision will likely have a negative impact on your credit report and credit score.

It’s also important to remember that defaulting on your student loans may affect you in other ways. Your federal student loans will no longer be considered for deferment or forbearance, you’ll lose many benefits extended to borrowers in good standing, and you may be unable to secure federal student aid in the future.

When can you settle student loan debt?

You may seek out a student loan settlement for a number of reasons, though these may differ depending on whether you have federal or private student loans. No two situations are the same, so it’s wise to investigate the potential for a student loan settlement if your loans are in delinquency but you haven’t fully defaulted yet. 

Reasons you might seek federal student loan settlement

You might seek federal student loan settlement in the following situations:

  • You can’t afford the payments based on your income level and other debts.
  • You’re not allowed to defer your payments.
  • You’re no longer eligible for federal or lender-issued forbearance.
  • You’re not working in a public-sector career that qualifies for student loan forgiveness, such as being a public school teacher or other government official.
  • You’ve already defaulted on the loan once.
  • You’re facing financial hardship from medical bills or sudden income reduction.

Reasons you might seek private student loan settlement 

Keep in mind that eligibility for private student loan settlement will vary from lender to lender since they don't have the same standardized regulations as federal loans. You might seek private student loan settlement if:

  • You’ve declared bankruptcy.
  • You can pay a lump sum without taking on more debt.
  • The loan is in default and has been sent to collections.
  • Your credit has been damaged.
  • You’ve missed three monthly payments in a row, which results in your loan going into default.
  • You’ve defaulted on another loan.
  • The loan holder has passed away.

How to negotiate student loan payoff

If you believe that negotiating a student loan settlement is the best fit for your financial situation, follow these four steps: 

  1. Prepare all loan documents. Before you contact the loan holder or collections agency, gather all the documents related to your federal or private student loans. Make sure you have the most up-to-date information, and confirm that the amounts owed are accurate. You should also have your latest pay stubs, tax returns, and other financial documents available in case you’re asked to provide evidence of financial hardship.
  2. Negotiate with the collection company. When you’re ready to negotiate with the collections agency, you’ll want to provide documents that clearly prove your financial situation. Using your pay stubs, tax returns, and payoff amounts related to other debts, you can suggest a settlement amount that aligns with your budget.
  3. Accept the agreement and make the payments. If you and the agency determine an acceptable settlement amount, you’ll formally agree to the new payoff number. Keep in mind that this isn’t a new payoff structure — you’ll be responsible for paying off that amount in full by the agreed-upon due date.
  4. Review your other debts and create a strategy for repayment. When you pay off your student loan settlement, it’s important to proactively prevent falling into delinquency on your other debts.

You can compare private student loan refinance rates using Credible, and it won’t affect your credit score.

How much could student loan settlement save you?

The amount that a student loan settlement could save you will vary based on factors like your income level, ability to pay, and other debts. 

Federal student loan settlement options

The Department of Education offers a variety of settlement options based on your situation. The types of settlements typically offered include:

  • Waiver of collection costs — Allows you to only pay the current principal balance and interest while waiving collection costs
  • Waiver of 50% interest — Allows you to pay the current principal balance and only half of the interest amount
  • Waiver of 10% of principal and interest — Requires you to pay as much as 90% of the combined principal and interest balance
  • Discretionary settlement — Might be offered if you don’t agree to any of the above amounts and it’s approved by the Department of Education
  • Non-standard compromise — Agreeing on an alternative settlement with the Department of Education that falls outside the standard agreements

If you’re hoping to negotiate the settlement of your federal student loans, it’s important to remember that you have rights as a federal loan borrower. Contact the Department of Education’s Federal Student Aid Office or Consumer Financial Protection Bureau for more information. 

Private student loan settlement options

Each private student loan lender will have its own unique guidelines for settling your debt. They may not be able to lower your settlement amount as much as a federal loan lender or collections agency would. If you have private student loans, contact the lender as soon as possible to discuss your options. 

Remember: The student loan settlement process will be unique to your situation in regards to how much you’ll owe, how much you could save, and any fees or special circumstances that’ll be included in your settlement agreement. 

If you’re ready to refinance your student loans, Credible lets you easily compare student loan refinance rates from various private lenders — all in one place.

Student loan settlement FAQs

Here are answers to some commonly asked questions about student loan settlement.

Who can help you negotiate student loan settlement? 

Depending on what type of student loan you have, you’ll need to identify the correct representative to speak with (the collections agency will typically be the first party in contact with you). They can tell you which loan provider initiated the collections process, and you can contact them directly to discuss your options. You can also ask the agency if it offers any repayment options for borrowers in your financial situation. 

Will settling student loans hurt your credit?

Settling student loans can affect your credit. Late or missed payments for your student loans — even those errors made before the loan goes into default — will stay on your credit report for up to seven years, even after your loan is settled. 

What happens after you settle your student loan debt?

After settling, you’ll receive paperwork that states you have no financial obligation to the initial balance of the loan that you left unpaid. You should no longer receive communications from your loan provider or the collections agency, with the exception of paperwork you’re required to file with the IRS during tax season. If you do receive information saying that you still owe money, contact the collections agency or the loan provider immediately and don’t make any additional payments until you confirm the legitimacy of the information.