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Student Loans Student Loan Repayment

How to Negotiate a Student Loan Payoff

Defaulting on a student loan is serious and costly. It can damage your credit score and lead to delays in future loan applications, wage garnishment, and legal troubles. 

So can you negotiate student loan debt that’s already in collections?

You have several options when it comes to paying off your loan. Student loan settlement is the process of renegotiating or settling your student loan debt. We’ll cover how to find your settlement options, who qualifies for settlement, and the pros and cons of settlement. 

In this guide:

Can you negotiate a student loan payoff?

It’s possible to negotiate student loan payoffs regardless of your loan type. You may be able to negotiate private and federal student loans, but the process isn’t easy. 

The outcome can vary depending on your lender and loan.

Private student loans

For private student loans, it’s possible to negotiate a reduced payoff amount—but often only if the loan is in default. Many private loans default if you haven’t made a payment in 90 days or more. 

Certain lenders may be willing to accept a negotiated settlement even if your loan is not in default, but they might request immediate payment if the loan is current. 

A lawyer or debt settlement company may be able to help you come up with a suitable agreement that benefits both sides. 

Federal student loans

For federal student loans, the negotiation strategy is different. 

The Department of Education offers several options, such as Income-Based Repayment or Pay As You Earn, to help reduce your monthly payments, which may supplement negotiations. You may also consolidate other federal loans into one loan with a single payment. 

Other than these options, typical negotiation choices may include:

  • Waiver of collection costs: With this waiver, you won’t have to pay the collection fees accumulated on your unpaid balance, but you’re still responsible for the entire principal and interest left on the loan. 
  • 50% interest waiver: This waiver is more forgiving, offering a 50% slash to your interest on the loan, which could help you better afford payments. 
  • Waiver of 10% of the principal and interest: If you can secure this option, you’ll pay 90% of the current principal on your loan and 90% of the interest. 
  • Discretionary settlement: A discretionary settlement happens when you and the loan servicer can’t agree to any of the options above and come to a different compromise. The Department of Education must approve the settlement.

Negotiating a student loan payoff often depends on the following factors: 

  • Your loan type
  • Your loan servicer 
  • Available repayment plans or programs

Pros and cons of negotiating a settlement for student loans

Before you decide whether a settlement is right for you, consider the pros and cons.


  • Save your credit score.

    Sometimes, part of your debt settlement can mean removing the default from your credit report. Plus, the longer you default on the loan, the worse it’ll be for your score. So in the same vein, the sooner you address the issue, the better.

  • Avoid bankruptcy.

    Bankruptcy should be a last-ditch effort to save your finances. Settling your debt can help you avoid reaching this point by ridding you of a large debt.

  • Settle for an amount that’s less than you owe.

    Companies want to get paid. Debt settlement companies know that, so they vouch for you, attempting to reach an agreement that works for you and the lender. At times, this is less than you owe in full. 

  • Stop the collections process.

    Debt settlement will end the collections process, including persistent calls about your student loan. 


  • You’ll likely pay high fees.

    Debt settlement is not a cheap process. Many debt settlement companies charge 15% to 25% of the debt settled.

  • Your credit may still be affected.

    No matter the outcome, defaulting on your student loans hurts your credit score. You’ll likely have to wait seven years to see this default record drop off your credit report.

  • Tax implications.

    You don’t get off tax-free when you settle student loan debt. You may have to pay taxes on the settled debt unless you qualify for an exclusion. 

How to negotiate a student loan payoff

Negotiating a student loan payoff can be a long, complex process. In general, you’ll go through the following steps:

Gather documents related to your student loans

Gathering documents related to your loans is the first step in negotiating a student loan payoff. You need to know exactly how much you owe, when the loan originated, your interest rate, and what payments you’ve already made. 

You may have to provide other financial documents, including the following:

  • Tax returns
  • Pay stubs
  • Medical bills (if any)
  • Rent or mortgage payments
  • Child care expenses
  • Other documents that demonstrate financial hardship

Contact your loan servicer

Once you have all the relevant documents, contact your loan servicer. Explain what’s going on, and ask whether you can speak to someone willing to negotiate the debt. You might not make much headway, but inquiring about your options is a good place to start. 

However, since you may already be in default, you might have to reach out to the collections agency your lender sold the debt to. Collections agencies are often difficult to negotiate with, and they might not be interested in negotiating at all, but it never hurts to ask. 

Research your negotiation options

Your options will differ depending on whether your loan is private or federal. Either way, you may consider getting help with the process. There are lawyers for nearly everything, student loans included. 

Student loan lawyers are helpful for those defaulting on private student loans. You have fewer options when it comes to negotiation, so a lawyer can advocate on your behalf. Lawyers can also help you avoid aggressive collections tactics.

Debt settlement companies can also work for you, negotiating your debt with the collection agency. You’ll often pay a hefty fee to do so and aren’t always guaranteed a certain settlement, so you could end up paying more than you expected. 

Cost of attorney vs. debt settlement company

Most debt settlement companies charge 15% to 25% of the settled debt. Lawyers’ charges often work differently. 

Your cost depends on where you live and the lawyer you choose to work with. In general, lawyers’ flat fees can range from $500 to $5,000, depending on the complexity of your case. 

Per-hour costs can range from $125 to $350. 

Prepare and submit your negotiation plan

Once you’ve decided on the right loan program or repayment plan, it’s time to start preparing your negotiation plan. Make sure to research the details of your loan agreement and create a plan that outlines the desired outcome. 

This is where you might want to work with a lawyer or debt settlement company that can handle the difficult calls and calculations. 

Include your financial situation, goals, and timeline in your proposal. After submitting your plan, you should be prepared to discuss it with your lender and explain why you believe it should accept this plan.

Let’s look at an example to demonstrate the various negotiation plans in action. We’ll assume your principal loan amount is $50,000, you owe $10,000 in interest, and you’ve racked up $5,000 in collections costs. In total, you owe $65,000. 

Waiver of collection costs50% interest waiver10% principal and interest waiverDiscretionary settlement
What you’ll pay$60,000$60,000$58,500Varies depending on the agreement 

Make your payment

After negotiating, you’ll have to pay the final settled amount in full. Request paperwork demonstrating proof of payment. That way, if collections companies continue to try to contact you, you can show them the document. 

What if you can’t negotiate a payoff settlement for your student loans?

There are times loan settlement just won’t work for you. 

For one, you must be in default on your loan, which you should avoid at all costs. Perhaps you aren’t willing to pay a lawyer or debt settlement company fees, or your lender is unwilling to settle. 

If you can’t negotiate, you’ll need to consider another option, including the following:

Loan consolidation

One possibility is to consolidate your student loans into one loan with a single monthly payment and possibly a lower monthly payment. This could reduce the interest you have to pay in the long term.


Another option is to refinance your student loans. You’re taking out one loan to pay off another, but it might come with better terms. 

Refinancing federal student loans to private loans can make sense for students who want to lower their interest rate or change the terms of their repayment plan and are comfortable losing federal benefits. 

Find out more about whether it’s a good idea to refinance federal student loans.

Forbearance or deferment

With deferment, you can suspend your loan payments for a specified time. This could help you take a break from payments and allow for more manageable payments when your deferment period ends. If you’re going through a prolonged period of financial hardship, deferment may be a good option before your loans default. 

Forbearance also allows you to postpone payments, but you’ll often have about 12 months before payments restart. Plus, when your loans are in forbearance, you still accrue interest.