If you’re wondering whether private student loan debt settlement is a good idea, then you’re probably in a bit of financial trouble already. And you’re not alone: Data shows that 11.5% of student loans are delinquent, a huge number when you consider that 44 million Americans have student debt. Unlike handling delinquent loans with a federal debt servicer, such as Great Lakes or Navient, private student loan settlement doesn’t include many of the same flexible options. For example, you will not be eligible for government income-driven repayment plans or mandatory forbearance and deferment.
Also, because each private lender has its own policies, your specific choices will depend on who you owe and how willing that lender is to work with you.
Let’s look at what’s involved with private student loan debt settlement and what other alternatives are available if you’re at the end of your financial rope.
Private student loan settlement: Can you settle your debt for less?
Private student loan debt settlement does happen, though this would generally occur after your loan is in default. While federal student loans aren’t considered in default until at least 270 days have passed without a payment, private loans can (in theory) go into default after just one missed payment.
Default brings a parade of serious consequences for your finances, including possibly having the debt sent to a collections agency and even facing a lawsuit, which could lead to creditors taking money directly from your paycheck or going after your property.
But your private lender might be willing to work with you, either on an affordable repayment plan or possibly settling the debt for less than you owe. Ideally, you’d want to fix things before the loan goes to collections, or a lawsuit is filed.
How your private student loans can end up in collections
If you stop repaying your private student loans, a private lender can contact you and try to secure payment. Often, however, the lender will have a third-party debt collector do this.
Having debt in collections can involve an onslaught of phone calls, emails and other communications, as the agency tries to recover the money owed. But the law also states that the collections agents may not use “abusive, unfair or deceptive” tactics, so be sure to know your rights as a borrower.
If you think you’re getting trampled on (or if there’s been a mistake, and the debt isn’t even yours), then look over these government tips on how to respond. Also, know that for more serious steps, such as wage garnishment, the collections agency or lender would need to get a judgment against you in court.
What it means if your private student loan lender sues you
Facing a lawsuit over your student debt can be extremely stressful, not to mention expensive, but sometimes, it does come to that.
If you lose your case, then the lender or agency can take action to recover the money, possibly including:
- Garnishing your wages
- Garnishing your tax return
- Freezing your bank accounts
- Getting a lien on personal or real property
At the same time, there are laws that cap the amount of money a lender can recover from you. For example, the Consumer Credit Protection Act limits wage garnishment, often at roughly 25% of your disposable earnings.
Because student loan debt is usually large, it’s a good idea to speak with an attorney who can help you through the process. An attorney can explain your specific options based on the law and the terms of your loan — inexpensive (and sometimes free) legal aid is available if you search around.
Also note that if the loans are very old, the collection of them might be unenforceable in court — though your credit would still be hit hard for nonpayment of debt. It’s also worthwhile studying some general tips for dealing with student loan lawsuits.
Private student loan settlement and other possible solutions
If your private student loans are in collections, or if you have a judgment against you, your three main choices are:
Pay the amount in full
Obviously, if you can pay the debt in full, you should. This is unlikely to be the case, though, or else you probably wouldn’t be in this situation.
Still, if you’re not yet in default and you know someone with great credit who can cosign a loan, you could refinance and pay off the old debt in one swoop.
Negotiate a repayment plan
Some lenders or collections agencies will work with you to create a repayment plan that you can afford. As mentioned, private lenders don’t offer the repayment options that federal loans have, but they may still be happy to recover the funds somehow, even if later than originally agreed upon.
However, remember that some collections agents can be a little tricky. For instance, do not give them your bank account information unless ordered to do so by a court. The debt collector could easily use that information to take money from your account, and you may have great difficulty proving you didn’t authorize it.
Settle your student loans for a lower amount
As with any consumer debt, there is the possibility of negotiating a lower amount to pay, though you’ll need to have that money ready, and you’ll definitely want to get the agreement in writing.
Usually, you’ll need at least 50% or more of the money you owe (including penalties and fees) for a lender to consider settling for less than the balance of your debt. Once an amount is agreed upon, you’ll generally be expected to hand it all over in a single lump sum.
Remember that if you settle your debt, the forgiven amount is reported to credit bureaus, so it will very likely hurt your credit. You may also owe taxes on this amount if the lender reports it to the IRS and you’re not insolvent.
If you decide to try a negotiated settlement, be sure to check out our complete guide to this process, though note that it will be up to the lender to decide whether or not to offer this option.
At the end of the day, the best move will depend on who your debt collector is and how much they are willing to work with you.