People sometimes worry if they can pay off their student loans like they would a credit card or loan. While it is feasible in some situations to settle student loans with student loan provider, it requires a significant amount of effort and may end in different consequences than you desire.
Let’s look into the possibility of settling student loans and other choices if it doesn’t work.
Who can settle student loan debt?
You may be able to settle a traditional student loan through the Department of Education. You will, however, have to jump through a lot of hoops. The Department of Education has the authority to halt the collection of student loans< and to negotiate a settlement with you.
Only a few people will fit the criteria for a settlement. You’ll almost certainly need to demonstrate extreme financial difficulty and an inability to repay through traditional methods.
Many lenders will force you to default on your loan before allowing you to settle. Federal loans default after 270 days of nonpayment, whereas private student loans default after 90 to 120 days.
A student loan default is a major black mark on your credit report. After failing, you will most certainly find it difficult to secure a loan or mortgage until the matter is resolved.
If you want to pay off your student debts, you’ll need to be sure you have the funds. Student debt balances can exceed tens of thousands of dollars. Even if you can cut your loan balance in half, you may still owe $10,000 or more.
Typically, a settlement agreement calls for a lump-sum payment to clear the remaining record. If you don’t have enough money to settle, your efforts will be futile.
Student loan lenders do not have to accept a settlement
Student loan servicers are not required to accept your settlement offer. In most circumstances, they have little reason to do so. Student loan servicers have extensive legal safeguards that allow them to sue you in order to compel repayment of your obligations.
Even if you start the negotiating process by defaulting on your loan, the servicer is not required to accept your offer. If the loan servicer accepts your offer, it may only accept up to 90% of the total value of your debt, resulting in very little savings for you despite your best efforts.
Settling your student loans may impact your credit score.
Paying off your school debt will not improve your credit score. When you miss a payment, your credit score will likely plummet quickly. If you are successful in coming to a settlement, your lender will most likely report that you did not follow the terms of the agreement or that you paid less than the total amount of the loan.
You can rebuild your credit score after the settlement, but it will take time. You will most likely have difficulty obtaining a credit card, purchasing a home, or purchasing a car with a loan.
Start the process of settling your student loan.
If you want to settle your student debt, try using these steps:
- Decide whether you wish to settle with a lump sum or monthly installments.
- Determine how much you can afford to repay.
- Make an offer to the debt collectors.
- Reach an agreement.
- Obtain a written debt settlement agreement.
Let’s break down these steps a little further.
Decide if you want to settle with a lump-sum payment or monthly installments
Determine what you can afford to pay in a lump-sum payment arrangement if you’re resolved to settle your student loan for less than you owe. You agree to pay off the debt in one payment, usually a percentage of the original amount, by giving a lump-sum payment.
If, on the other hand, you are unable to make a lump-sum payment at this time, consider establishing a new monthly payment structure. Your settlement agreement will include monthly installments for several months or years until the debt is paid in whole, which is frequently the case.
Both of these strategies are effective, and most student loan debt collection agency will accept either sort of settlement.
Determine how much you can afford to pay off
Once you’ve decided on the type of settlement you want, figure out how much money you can afford to pay out in a lump amount or monthly installments.
You should thoroughly examine your finances and create a budget. If you do not fulfill your settlement agreement because you cannot afford it, additional problems, such as debt litigation, may occur.
Contact the debt collectors and make an offer
It is recommended that you begin with at least 60% of the loan’s value. Don’t be surprised if your creditor asks for more.
Allow your student loan to get into arrears. When it occurs, send a settlement offer to your student loan provider (or debt collector) that says something like this:
“I owe [$___] for [account number] right now.” I don’t have that type of money right now to pay off the debt. But I do have [$___] that I can pay in full within 30 days to clear the obligation. Please answer this message with a settlement agreement if you accept. If you wish to respond, please include your counteroffer amount.”
Negotiate a settlement with student loan provider
Wait to see how your student loan provider responds. They will almost certainly respond with a counteroffer. Before you achieve an agreement, you may need to go through multiple rounds of discussion.
Above all, don’t accept an offer you know you can’t afford. This will just aggravate the situation.
Get the debt settlement agreement in writing
If your student loan provider gives you a repayment plan that you can afford, acquire it in writing before transferring funds to settle your loan.
You’ll want to be certain that you completely perform your half of the bargain. If you do not, the student loan provider may opt to cancel the contract, potentially putting you in legal danger.
Loan service providers and debt collectors will normally draught the settlement agreement for you, so double-check it before signing.
What are the substitutes for settling your student loan debt?
There are some options to alleviate your student loans if you look into them.
Many student loan borrowers’ initial option is an income-driven repayment plan. You make payments based on your annual salary and family size under an income-driven repayment plan. In many cases, an income-driven repayment plan can reduce your monthly payments to an acceptable level.
You could also consider getting your student loans discharged. In rare cases, such as if the college they studied at closed before they could finish a degree program or if they suffer from an entire and permanent handicap, a release may be an option for some consumers.
If you work for a government or nonprofit agency, you may be eligible for loan forgiveness. Before the servicer pardons your loans, you must make at least 120 payments.
Finally, you may want to think about refinancing your debt. Refinancing can reduce your interest rate, permitting more of the money you pay each month to go toward principal rather than interest and fees on your loan. If you refinance your loan with a non-government supplier, you may lose certain perks, such as consideration when choosing an income-driven repayment plan.