Negotiating a settlement if your behind on student loans


Millions of graduates across America are bearing the burden of student debt they took out when in college. A large percentage are either deferring it or simply just not dealing with it. But it is important to know that student loan debt is not like other debt which can be forgiven after years down the line and that it is nearly impossible to erase through bankruptcy.

If you are in a situation where you have student loans and have not been making any payments, chances are the amount you owe is even higher due to the added interest thats been accumulating. Deferring the payments usually is only available the three years after graduation before the loan is in default. This adds further interest and collection fees. To get out of this spiral, it might be wise to secure funds from elsewhere and discuss directly with the student loan holder about settling your student debt for less than what you owe.

Before you approach the student loan company about a settlement, find out if it is a federal loan or private student loan. If it is a federal loan, settling for a lower amount is not normally an option but continuing to defer payments as long as you can show financial hardship is easier.

A private student loan is less flexible on deferment if you are in default, but if you approach the company holding the student loan about principle reduction they are more willing to agree if you were to pay the whole lump sum upfront.

When you are in default, private student loan holders send your account to collection agencies. According to, these agencies are authorized to accept settlement offers lower than what you owe.

Some common accepted settlements:

  • the loan principle and current interest minus collection fees.
  • the principle plus half of unpaid interest.
  • a 10 percent reduction of total debt balance you currently owe.
But settlements with more reduction are possible, though that requires more negotiating on your part to show them that this is the only way they will get paid for their loan.

A major part of this negotiating is showing your hardship. If you do not have stable income or savings, explaining that this settlement reduction is the only way they would be able to get money for the loan is crucial. Collection agencies weigh their options of accepting a reduction or to keep the collection to eventually sue you. If they are led to believe you have income or money in the bank, they might reject your settlement request.

Also it is important to emphasize that you will only get the money from your friends or family once the current student loan lender has agreed to a settlement. This is so the collection agency doesn’t think that you will have availability to cash even if they reject the settlement proposition.

Finally, once they do agree to a settlement, let the collection agency give the offer of the amount. The reason is because any offer you give will be the lowest amount you can work with, and there is a chance they will give a lower offer than you expected. And if they do not, you are still able to request a lower amount than what they offered.

If you do not have a friend or family to loan you the money, discuss with a private lender their rates and loan programs. Depending on what you negotiate the settlement amount to be, there is a possibility the new payments would be lower than your old student loan payments.


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