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Student Loans Student Loan Repayment

How Do You Legally Settle Student Loan Debt?

For those in default on their federal or private student loans, settlement may be an option. 

When you settle student loan debt, you negotiate with your lender or loan servicer to repay a lump sum that’s less than what you owe. Because debt settlement can harm your credit, this option is often the last resort if you’re behind on payments and your credit is already damaged. 

The process for settling federal and private student loan debt varies, and private lenders may be more willing to work with you. If you’re unsure which you have, check the top of a recent bill. You’ll find the name of your loan servicer, federal loan program, or private lender there. Once you’ve determined whether your student loans are federal or private (or both), here’s what to know about settling your debt. 

In this guide:

Can you settle federal student loan debt?

If you default on your federal loans, servicers can employ several measures to collect on past-due debt, including wage garnishment and tax return confiscation. Loan servicers are often able to collect, which makes them less willing to negotiate with borrowers. Thus, settlement is rarely an option. 

But borrowers in default—more than 270 days behind on federal student loan payments—can try to negotiate if they can’t afford their monthly obligations. You’ll need to prove financial hardship with copies of pay stubs, tax returns, and other documentation. 

Settlement might also be possible if you’ve defaulted on federal loans multiple times or moved out of the country. Federal loan servicers can no longer garnish your wages or confiscate your tax returns if you don’t live in the U.S. Borrowers who’ve become totally and permanently disabled could qualify for federal student loan discharge. 

Can you settle private student loan debt?

Since private lenders can’t garnish your wages without a court order or seize your tax return, they may be willing to negotiate if you default on your student loans. Timelines for default vary by lender, but generally, loans default if you’re 90 days behind on payments. 

Whether a lender is willing to negotiate depends on your situation, its policies, and other factors. So be sure to keep this in mind if you’re thinking about private student loan settlement.

What should I do if I think settling my student loan debt is an option?

If you’ve exhausted other payment relief options and settling your student loan debt seems like the best choice, here’s what the process could look like. Remember that it could vary based on whether you have federal or private loans.

  1. Gather documentation: If you’re experiencing financial hardship, expect to provide copies of your W-2s, pay stubs, and tax returns. You may also need copies of rent or mortgage statements, utility bills, and medical bills. 
  2. Decide how to proceed: You can work with an attorney, or contact the loan servicer or collections agency. Note that hiring a lawyer is expensive and may not result in a better outcome. 
  3. Prepare a settlement offer: Once you’ve collected documentation and decided how to proceed, it’s time to prepare a settlement offer. Figure out a lump sum you can afford to pay based on your situation, and put it in writing. 
  4. Make the call: Call the company contacting you, or have your lawyer reach out on your behalf.
  5. Negotiate a settlement: Tell the representative you’d like to pay a lump sum to settle your federal student loan debt. Explain your reason—default, financial hardship, etc.—and ask about your options.
  6. Get it in writing: If you agree on a settlement, ask your loan servicer or collections agency to draft the terms in writing. That way, you’ll have documentation of the agreed-upon settlement terms and amount.
  7. Make a payment: After you’ve received a letter outlining the terms of your settlement, you’ll want to make a timely payment.

>>Read more: How to negotiate a student loan payoff

Pros and cons of settling student loan debt


  • Alleviate some of your debt burden

    Negotiating a settlement could reduce or even eliminate your student loan debt.

  • Improve your financial situation

    Your financial situation could improve without the burden of student loans. You’ll have more room for living expenses and discretionary spending.


  • Your credit will take a hit

    Debt settlement will damage your credit score and could stay on your credit reports for up to seven years. 

  • Potential tax implications

    Your settled debt could be taxable income on next year’s federal return. 

  • You’ll need a large amount of money

    Since you’ll often need to pay a lump sum, plan to save up a sizable amount, depending on what you owe and the settlement amount. 

What might the student loan debt settlement process look like?

The process could be long and complicated if you’re considering student loan debt settlement. You can negotiate on your own or hire an attorney to help, but keep in mind that lawyers are expensive, and you may not get a better settlement offer by hiring one.

Settlement terms can vary depending on your lender and whether you have private or federal student loans. While the U.S. Department of Education (DoE) provides little information about debt settlement, the National Consumer Law Center indicates the DoE offers the following options for Direct Loan settlement:

Federal Direct Loan settlement optionTerms
Principal and interestBorrower agrees to pay the principal and interest on their loans, no collections fees.
Principal and 50% interestBorrower agrees to pay the entire principal and 50% interest on their loans, no collections fees.
90% principal and interestBorrower agrees to pay 90% of principal and interest on their loans, no collections fees.
Discretionary compromiseBorrower needs prior approval from the DoE, and settlement terms vary.

If your negotiation is successful, request written documentation of the settlement agreement with stated terms and amounts. 

You will likely need to pay a lump sum—often to a collections agency if you’ve defaulted. 

Alternatives to settling student loan debt

Settling your student loans can harm your credit, so it’s wise to consider only after you’ve exhausted other payment relief options. Alternatives to consider include: 


With loan deferment, you negotiate with your lender to stop making payments temporarily. This may be an option with federal student loans and certain private student loans. 

Note that interest may still accrue on your federal student loans during deferment periods, and whether it does with your private loans depends on your lender.


If you opt for loan forbearance, you can stop or reduce payments for up to a year. Like deferment, forbearance may be an option with federal or, on occasion, private student loans. But whether it’s an option with a private loan will depend on your lender. 

Interest will continue to accrue on federal loans during loan forbearance.

Change your repayment plan

Modifying your repayment plan may be possible with federal and private student loans. Federal loans have four income-driven repayment options:

Repayment options with private lenders can vary, so speak with your lender if you’re considering this route.


Refinancing your student loans may be an option if you’re juggling multiple payments and seeking a lower interest rate. 

You can refinance both federal and private student loans with a private lender. Just weigh the benefits you’ll sacrifice—such as federal loan forgiveness—if you refinance federal loans with a private lender. 

Many banks and credit unions offer student loan refinancing, but rates and terms vary, so it’s wise to compare options.