How Do You Legally Settle Student Loan Debt?
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Student loan debt can feel like a crushing burden and millions of Americans have already defaulted on their obligations.
Borrowers may have the option to erase the debt burden through student loan settlement. When a borrower settles student loan debt, they agree to pay less than what they originally owed.
Certain factors can determine whether or not someone is eligible for settlement and borrowers shoulder consider all of their student loan financial hardship options before pursuing settlement.
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First, settling student debt is different from loan forgiveness or discharge. In these situations, the balance is canceled when a borrower meets particular criteria. With a settlement, you’re negotiating with the lender and then the debt can be settled without action from a collections company or legal action.
There are different payoff options available when borrowers go the route of federal student loan settlement. For borrowers in default, the settlement options can seem like a substantial benefit. However, many of the federal student loan settlement plans require borrowers to pay off a lump sum, so they must be prepared.
What Types of Student Loans Can Be Settled?
First, federal student loans can be settled but the borrower has to be in default. Anyone with federal student loans can contact the Department of Education.
Even though settling federal student loans is an option, it’s rare. With federal loans, the government will often prefer other routes to collecting the debt, such as garnishing wages/tax refunds or rehabilitation.
Settling student loan debt is more common with private student loans. This is because private lenders have fewer ways to get money from borrowers when they default. With federal student loans, the government can often begin wage garnishment relatively easily while private lenders must first go to court.
Still, even a private lender is unlikely to negotiate a settlement, because they know this debt can’t be discharged in bankruptcy.
Do You Need a Lawyer for Student Loan Settlement?
Student loan lawyers and companies provide services to borrowers struggling with repayment or in default. Student loan lawyers often have experience with both federal and private loans, and they also have experience working within the federal system. So they are familiar with more complex guidelines and laws.
Consulting a student loan lawyer can be helpful if you’re struggling with repayment, already in default, or if you want to learn about your options. When a borrower is trying to settle student loan debt, a lawyer can help with negotiations. If the settlement outcome is favorable to the borrower, the cost of the lawyer’s services may be worth it. Lawyers can be expensive, but if you consult them before your problem escalates, they may save you quite a bit of money.
Borrowers without a lawyer should get the settlement agreement and terms in writing. They should also make sure they receive a statement showing when the debt has been paid in full based on the settlement terms.
How Likely Is It That You’ll Get Your Student Loans Settled?
There are certain scenarios where a borrower isn’t going to qualify for student loan debt settlement. This includes in situations where a borrower has purposely defaulted just to reach a settlement, or if a court judgment has already been issued. If someone appears to have enough cash on hand to pay his or her full debt or make payments, settlement is unlikely as well.
Ultimately, whether it’s federal or private student loans, negotiating a settlement is difficult and uncommon. It’s rarer to work out a settlement with federal loans as compared to private loans because there’s not as much incentive for the U.S. government to settle.
Does Student Loan Debt Settlement Hurt Your Credit Score?
Even if a borrower negotiates a settlement, there can be longer-term consequences. First, student loan debt settlement can hurt your credit score. This is because lenders require borrowers to be in default before they’ll even consider this option. During this time in default, the borrower’s credit score will drop. If a student loan is sent to collections, it’s going to reflect negatively on the borrower’s score.
There are also tax implications of debt settlement. When someone saves money through settling loan debt, the IRS views this money as income. Borrowers owe the IRS income tax on the amount of the debt that was forgiven.
In sum, some student loan borrowers think debt settlement is the answer to their troubles, but this isn’t necessarily the case. While debt settlement can reduce the total amount you have to pay off or reduce monthly payments, there are many drawbacks to consider.
