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Yahoo
2 days ago
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How to negotiate student loan debt settlement
Key takeaways Your student loans generally have to be in default to negotiate a settlement. Settlements usually refer to private loans, while compromise is more common with federal loans, but both involve negotiating to pay less than what you owe. You'll need to start by contacting your loan servicer to see if they are open to debt settlement. Any settlement should be finalized in writing with clear paid-in-full terms. A settlement could damage your credit score and even have tax consequences. Shop Top Mortgage Rates Personalized rates in minutes A quicker path to financial freedom Your Path to Homeownership If you have missed or are unable to make payments on your student loan debt, a student loan debt settlement or compromise may offer some relief. Eligibility generally requires nine months of missed payments, and even then, a settlement isn't guaranteed. Federal student loan compromise is more difficult and requires approval by government agencies. Private student loan settlements are easier since they're negotiated directly with the lenders without the involvement of any federal government agencies. Whether you plan to tackle this on your own or get the help of an experienced attorney or nonprofit, understanding how to negotiate federal or private student loan debt settlements could give you an idea of whether it's a realistic relief option. Who should consider a student loan settlement? Your federal student loans are 270 days past due. Your private student loans are 90 to 120 days late. Your loan is in some stage of the collection process. You have the cash to make a lump sum payment to settle your balance. You've received notice of a pending court judgment or garnishment action. You can prove you don't have the resources (income or assets) to repay the full amount you borrowed. You've defaulted on the same loan several times. If you find yourself in any of the scenarios above, you'll need to take very specific steps soon to increase the odds of a successful student loan settlement. 5 Steps to negotiating student loan settlements Once you've confirmed your default status with your private or federal student loan servicer you'll need to take some steps to start the settlement process. 1. Gather required documentation Lenders are more likely to negotiate if you're experiencing financial hardship. Gather proof of your situation to show why you can't repay the full amount. This documentation might include: Paystubs or tax returns showing a large drop in income Written proof of a job termination or layoff Documents showing disability due to an accident or illness Detailed letters of explanation regarding the nature of your hardship Supporting letters from doctors, employers or social service agencies, if applicable 2. Have your funds ready If you're hoping to reduce the amount you owe by a substantial amount, make sure the money is available. Joshua Cohen is a lawyer who helps people struggling with student loan problems. He advises borrowers not to come to the table without cash in hand. 3. Know the difference between federal and private settlement options You have fewer settlement options for federal loans than private student loans. You'll also need to be in full student loan default to even be considered for a federal settlement – being late on payments won't cut it. Private student loan lenders may offer more settlement options, even if you're not fully in default but still in collection status. Related: How to avoid joining the nearly 5 million federal student loan borrowers in default Cohen says not to bother trying to set the terms of what you want to – or even think – you should have to pay. The settlement options don't allow for any wiggle room and usually include only two choices: 100% principal + 50% interest 90% of principal and interest Although there is a 'compromise' option, Cohen said it's usually only available in rare circumstances. Settlements offered by private lenders can vary significantly. Student loan attorney Stanley Tate at Tate Law explains the factors that may influence how little or how much you could end up settling your balance. 'Older, stale debts – especially those past the statute of limitations or those previously charged off – might settle for as little as 10 to 20 cents on the dollar,' he says. 'On the other hand, newer defaults, with recently charged-off loans, could require settlements closer to 60 to 70 cents on the dollar. According to student loan attorney Adam Minsky, private lenders may offer more settlement flexibility than federal student loans. 4. Negotiate the terms of the settlement You can try to negotiate directly with your lender or hire an attorney to help you. If you go it alone, explain your situation and ask open-ended questions such as, 'What are my options at this point?' or 'How can we settle this debt?' Allowing the lender to make the first offer gives you the advantage since you know the starting point for negotiations. Hiring an experienced student loan attorney may give you an edge, especially if the lawyer knows how your lender's settlement process works. 5. Request a paid-in-full statement Never make a payment until you have a written agreement that clearly outlines the terms of the settlement. This should include the amount you're paying, the deadline for payment, as well as confirmation that the lender will consider the debt settled once payment is received. Have a lawyer review the terms with you, and save your paid-in-full statement in case lenders or debt collectors try to request money from you later. You might also need your statement to request an update on your credit report or when filing your tax return. How student loan debt settlement works Not all student loan lenders are willing to entertain settlement offers, and the amount of debt that can be forgiven varies according to the lender. This is especially true when it comes to settling private vs. federal student loans. 1. Federal student loans The government won't settle a student loan balance unless you're in default. Even then, settlement terms are typically not affordable. With an arsenal of collection tools that includes wage garnishment and tax refund offsets, federal loan servicers are less likely to negotiate. According to Tate, term settlements tend to 'require nearly the full principal balance, plus a substantial portion (often 50 percent) of the outstanding interest' that is due in 90 days. If you qualify and can afford to repay private student loans and the lower rates they offer, Tate says using them to pay off your federal student loan balances may make some sense, but he warns against refinancing to avoid the more severe federal collection tactics since 'that would be viewed as deceptive, potentially fraudulent, and [will expose] you to serious legal consequences.' 2. Private student loans You're likely to have much more luck negotiating a settlement with a private student loan lender because they don't have the collection power of the federal government. They also want to provide some type of return to their investors. If you can't refinance or keep up with payments, Tate says you may find options with private lenders that you won't find with federal student loan servicers. 'In those situation, private lenders are frequently open to accepting less than the full balance owed, but it's never a guarantee.' Some attorneys have more luck negotiating private student loan settlements as part of a bankruptcy. 'I can often renegotiate the terms, including dropping the interest rate to 0%, get a long-term fixed affordable payment and plan for the borrower which also protects a cosigner,' Cohen says. Settling student loan debt: Pros and cons Pros Saves money Gets you out of debt Avoids court Improves your credit score Cons Lowers your credit score Reduces your available cash Increases potential tax liability Lenders may not settle at terms you can afford Pros in detail Saves money: You could substantially reduce the amount you owe on private student loan balances, or stop the interest-accrual on delinquent federal loans. Gets you out of default: Once you settle, your remaining balance is cleared and your account closed. Avoids court: By settling, you may be able to avoid being taken to court, paying legal fees or having your wages garnished. Improves your credit score. As your rebuild your credit score with new debt that's paid on time, your credit scores may increase. Cons in detail Lowers your credit score: Missed payments and defaulting on your loan can dramatically lower your credit score. Reduces your available cash: You'll need to pay a large lump sum of cash to settle, leaving you with less cash on hand to pay for emergencies or other expenses. Increases potential tax liability: The debt that the lender or collection agency cancels could be considered taxable income. Lenders may not settle at terms you can afford: This is more true for defaulted federal loans than private student loans. Lenders aren't required to settle for less than you borrowed. 4 Alternatives to student loan settlement Before settling your student loans, try getting back on track with your payments through alternative options that may be available. 1. Deferment or forbearance If you're facing short-term financial hardship, deferment or forbearance can temporarily pause your loan payments, as long as your loan was, or is, taken out before July 2027. That hardship flexibility will end for loans taken out after July 2027 as part of student loan repayment changes that went into effect as part of the passage of the One Big Beautiful Bill (OBBB). The forbearance term will also change from 12 to nine months. 2. Income-driven repayment plans The OBBB will also see big changes for income-driven repayment (IDR) plans on student loans taken out after July 1, 2026. Only the revised standard plan and the Repayment Assistance Plan (RAP) will be available. Income-based repayment (IBR) may also be available. Borrowers in discontinued programs will need to change to one of the available repayment programs by July 1, 2028. That would put an end to previous income-driven repayment plans, which based your payments on 10 to 20 percent of your discretionary income for 20 or 25 years of payments, after which the government would forgive the remaining balance. 3. Refinancing If you have good credit and a stable income, refinancing your student loans with a private lender could lower your interest rate and reduce your monthly payments. Be mindful that refinancing federal loans with a private lender will mean losing access to government protections like forbearance and income-based repayment plans. 4. Federal student loan consolidation To help lower your monthly payment and make your loans more manageable, you may be able to consolidate your federal student loans into one Direct Consolidation Loan. Keep in mind that, while this can lower your monthly payment, you will have a longer repayment term and pay more in interest over the life of the loan. To consolidate your federal student loans, they must be in repayment or in a grace period. Related: Can you consolidate defaulted student loans? Student loan resources help provides federal student loan information, including repayment options, forbearance, deferment and delinquency guidance. For help with your private student loans, reach out to your lender or servicer. Or contact an experienced student loan lawyer for a consultation. Borrowers who are struggling to repay their student loans have several resources available. A few options include: The Consumer Financial Protection Bureau (CFPB) is a government agency that protects borrowers from predatory lending and scams. The National Consumer Law Center works with lawyers and advocates to provide student loan assistance to borrowers with low incomes to help them understand their rights and loan responsibilities. The Student Borrower Protection Center is a nonprofit focused on protecting student loan borrowers. You can find several helpful resources on the center's website, including a list of state-based student loan ombudspersons and advocates to help with loan-related issues. Bottom line Settling your student loan debt can provide financial relief, but it may not be affordable if you have federal student loans. Private student debt settlement is typically more cost effective, but the amount private lenders are willing to settle may vary based on a variety of factors. Even if a settlement is possible, it can negatively impact your credit and may result in tax liabilities on the forgiven amount. Before pursuing this path, it's important to explore alternatives, such as IDR, RAP or refinancing, which could offer long-term relief without the downsides of settlement. Frequently asked questions What happens if you never pay your student loans? If you don't repay your student loans, you may incur late fees, penalties and long-term credit score damage. This can disqualify you from future loans, housing rentals and even jobs. If you miss enough payments, your lender can file a lawsuit against you, seize your tax refunds and garnish your wages to repay the debt. Should I pay off my student loans in one lump sum? Yes, as long as you have the cash to pay the amount in full within the offer period. Don't make any payments until you have the settlement offer in writing from your lender or lawyer. How is the student loan debt settlement calculated? Federal student lenders will offer only one of two settlements: 100% principal plus 50% of owed interest or 90% of principal and interest owed. Settlements for less than that are rare and require proof of extreme hardship. Private student loan lenders will base the settled amount on your financial situation, the age of the defaulted loan and other factors that may vary. 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Yahoo
21-07-2025
- Business
- Yahoo
Federal student loan changes making you eye private lenders? Here are 7 with federal loan-like perks
Key takeaways Federal student loans are known for unique benefits like flexible qualification requirements, income-driven repayment plans and potential loan forgiveness. Recent changes to the federal loan program have taken some benefits away, at a time when private loan lenders are starting to offer products with features similar to federal loans. Even with recent changes and uncertainty, federal loans may still be the best first option. Issues with federal loan servicers, uncertainty about loan forgiveness and new changes to the federal student loan program have left many wondering if private student loans may be a better option. Some borrowers may now need to use private loans in addition to their federal ones due to new federal loan amount caps. When private student loans become necessary, borrowers may want to consider lenders that offer products with federal loan-like benefits. Changes to federal student loan benefits may force some to consider private loans The passing of the 2025 reconciliation bill brings major overhauls to the federal student loan system, most of them starting July 1, 2026. The bill eliminates certain programs, including the Grad PLUS loan and most income-driven repayment plans. Borrowers will also lose hardship and unemployment deferment, as well as long forbearance timelines. The program now limits forbearance to 9 months during every 24-month period. Additionally, the bill places borrowing limits on loans you could once use to fully fund your cost of attendance. With federal student loan borrowing limits now capped, many will need to find other funding sources. Learn more: Major changes coming to federal student loan program 'The new annual and aggregate loan limits specified in the budget reconciliation bill may shift some borrowing from federal student loans to private student loans when borrowers reach the loan limits, especially for parents and graduate students,' says leading student loan expert and Bankrate contributor Mark Kantrowitz. Some federal student loan benefits remain Federal student loans will still offer an income-driven repayment option, loan forgiveness programs and discharge options that most, if not all, private student loans lack. Federal loans also offer more flexible qualification requirements and fixed interest rates. These benefits may continue to make federal loans the clear winner in the federal vs. private student loans debate. 'You don't need to have good credit to qualify for a federal student loan,' Kantrowitz says. The interest rate on federal loans is also the same for every borrower of that particular loan, regardless of their credit. 'The fixed interest rates on federal student loans may be better than on private student loans, especially for borrowers who do not have excellent credit,' he adds. While some private student loan rates can be lower than federal loans, those rates are often reserved for borrowers (or cosigners) with excellent credit. But there are other federal loan-like benefits that some private lenders may offer to borrowers — some regardless of credit. What federal loan-like benefits can you find with private lenders? Federal loan benefit Offered by some private lenders A fixed interest rate that is the same regardless of credit No No credit history or cosigner required for undergraduate and graduate loans Yes Loan forgiveness programs, including public service loan forgiveness No Potential loan forgiveness at the end of repayment term Yes Interest on some loans may be covered while in school No Income-driven repayment plans Yes Grace periods Yes No prepayment penalty Yes Loan forgiveness for death or permanent disability Yes Some private student loans offer federal loan-like features Despite changes, Bankrate experts still agree that federal aid is the best place to start your search for education financing. However, if student and parent borrowers need to turn to private loans after exhausting those resources, they may be able to keep or recapture some federal loan benefits at one of these lenders. RISLA Benefit: Income-based repayment, potential loan forgiveness Rhode Island Student Loan Authority, or RISLA, provides an unusual income-based repayment (IBR) option for borrowers facing financial hardship. Just like the federal loan income-driven repayment plan, RISLA's IBR plan bases a borrower's monthly payment on income and family size. The borrower must show evidence of their financial hardship to qualify; additionally, they must verify their income and family size each year. IBR payments may change if that information changes. While the IBR program is intended to be a temporary program, not a standard repayment plan, RISLA will forgive any remaining balance after 300 payments or 25 years on the plan. Ascent Benefit: No credit score requirement, progressive repayment plan Instead of basing eligibility on a student's credit score, Ascent provides an outcomes-based student loan option for college juniors and seniors. This loan doesn't require a credit score or cosigner. Your eligibility is determined by factors including — but not limited to — your school, program, GPA, academic performance and cost of attendance. Ascent also offers a progressive repayment option for certain loans that allows you to reduce your monthly payment, then gradually increase it over time. With this option, you'll still be able to pay the loan off in full within your original repayment term. This mimics the government's now-eliminated graduated repayment plan, which featured low initial payments that gradually increased every two years. YELO Funding Benefit: No credit score requirement, income-contingent repayment, potential loan forgiveness Dan Rubin, founder and CEO of YELO Funding, saw a gap in what he calls the 'gap financing market' — when federal aid doesn't cover the full cost of tuition and students turn to other options. 'Not every kid comes from a socioeconomic background where their parents can borrow money … so they go through private lenders,' he says. 'But private lenders mean you need to have a good credit score. And most importantly, you need to have a cosigner. And a lot of kids don't have a good cosigner.' According to Rubin, when a lack of credit or cosigner keeps students from borrowing money for school, they can't live up to their potential. Instead of requiring a credit score and/or cosigner, YELO considers factors like what the student will be studying and where, their GPA and experience, their earning potential and risk of unemployment. These are all important factors for YELO because the lender also uses an income-contingent repayment plan, similar to an income-share agreement. Borrowers enter into a contract in which they must pay a fixed percentage of their future income for a specific number of years. YELO pauses payments if the borrower loses their job and caps its APR and repayment amount. If the amount is not paid off within the repayment window, the borrower is off the hook for the rest. ELFI and Laurel Road Benefit: Forbearance up to 12 months Beginning in 2027, borrowers experiencing unemployment may only pause payments on their federal loans for nine months during a 24-month period. However, some private lenders, including ELFI and Laurel Road may offer forbearance for up to 12 months. ELFI's forbearance is considered on a case-by-case basis and granted at the discretion of the lender. Laurel Road may offer economic hardship forbearance for up to twelve months (in three-month increments) and forbearance assistance for natural disasters for two months. Sallie Mae Benefit: Graduated repayment period Sallie Mae offers a graduated repayment period (GRP) that allows you to make interest-only payments for the first 12 months after your grace period ends, then ramp up to standard principal and interest payments. This serves a similar function to the discontinued federal graduated repayment plan, allowing a less financially stressful transition school to career. According to Sallie Mae, it was the first private student lender to offer this type of repayment option. Splash Financial Benefit: Up to 25 years of repayment While most private student loan lenders have repayment terms of up to 15 or 20 years, Splash Financial is one of the only private lenders that has repayment terms of up to 25 years. This is more in-tune with federal student loan income-driven repayment and extended repayment plans (now eliminated) that lasted for 25 years. Bankrate insight The majority of private loans offer a grace period after college graduation as well as no prepayment penalty and loan discharge due to death or permanent disability. However, it's important to check with your lender and ensure you understand the terms of your loan before taking it out. What should students consider when choosing their student loans? 'When considering a private student loan, borrowers should consider the interest rates, fees, and repayment term. This can manifest in differences in the monthly payment and the total payments over the life of the loan,' says Kantrowitz. To see what different rates and terms will cause you to pay each month and in overall interest throughout the life of the loan, get prequalified with a few lenders and plug the different offers into a student loan calculator. While private loan costs may be higher now, that may change. Kantrowitz predicts that increased demand may produce more competition among lenders, causing some to offer discounts and other features to attract better quality borrowers. Decide what perks and features are most important to you. For most borrowers, federal loans will likely still check more of those boxes than private loans — at least for now. Bottom line: Federal loans should still be the first option Experts, including Kantrowitz, recommend students seek out federal student aid and federal loans before going for private options. They also warn that refinancing federal loans will forfeit those benefits and to think twice before doing so — even if student loan refinance rates may be lower or the loan may be easier to manage. And that advice still rings true. Because, despite recent changes and uncertainty, federal student loans still offer the most benefits. Additionally, applying for federal loans (start by completeing the FAFSA) also grants you access to other financial aid that doesn't need to be paid back. So should be the first place you go to finance your education before using private loans to fill in funding gaps. Rubin of YELO Funding agrees, saying he's competing with other lenders trying to fill the gap between federal loans and tuition costs, not the federal loan program itself. 'Take as many subsidized, unsubsidized [federal] loans, scholarships and grants — as much as you can,' he says. 'Then you can come to us.'
