Can You Negotiate Your Student Loan Debt?

When you signed up for a loan from a financial institution to help pay for college tuition, you probably used it to bridge the gap between grants, scholarships, and other money. And you may not have thought of it as a burden, merely as a debt you would need to one day pay.

With the economic downturn of the 2010s, many graduates are finding they’re having a hard time paying their student loans. It may feel as if you’re drowning in debt, but you have options. You can negotiate your student loan debt, which is kind of like refinancing your house into a more manageable monthly payment.

There is light at the end of the tunnel, and your financial institution can help you find it.

When Should You Settle Your Student Loan Debt

If you are unable to pay the monthly loan balance, your loan may go into default. This is not uncommon as more than five million accounts are in default. A lender will put your account into default if there hasn’t been payment on the private loan within 270 days.

When an account goes into default, it is sent from the financial institution, like the credit union or bank, to a collection agency. You do not want debt collectors after you for your student loan. When your loan gets to a collection agency, it affects credit scores and more and could hinder you from economic mobility.

Whether you are negotiating a settlement from a private lender or a federal one, you have different options. Still, the process usually entails four steps – approach the lender, arrange a new amount, get it in writing, and pay the desired amount in monthly installments.

If you simply let your account fall into default, the agency handling it could bring you to court. If you continue to miss payments, the agency has the right to have your wages garnished, and it can even affect the amount in your tax refund.

You can negotiate your loan terms if:

  • You can’t afford payment – There is no national baseline or standard for hardship, so you will have to prove that you cannot pay your loan back. Pay stubs, bills from credit cards, and tax documents will all provide evidence of hardship.
  • You’ve defaulted more than once – The best way to recover your debt from default is through rehabilitation. Debt settlement will not remove it from your credit history.
  • There is no other way – If the loan collector believes there is no other way to get the money, they will likely agree to a debt settlement.

But you don’t have to let it get that far; when you negotiate your student loan, you can discuss payment plans that will better fit your lifestyle and earnings.

Negotiating a Settlement From a Private Lender

If you haven’t paid your student loan for a while, you may be nervous to start the process again. Collection agencies have three avenues to offer you if your account is in default.

Private loans don’t always, but usually follow these guidelines:

  • For a loan that has not yet been sent to a loan collector, you will have to pay 70% to 80% of the balance.
  • For a loan that has been in default for at least six months and is with a debt collector, you would have to pay 60% to 80% of the balance owed.
  • If you haven’t paid in two years, you could have to pay 20% off the balance.

If you don’t pay your private student loan, the agency will contact you in several ways – email, letters, and phone calls. If a co-signer is on the loan, the agency will also contact this person to ask for repayment.

Before you start the negotiations with your financial institution or collection agency, make sure you have enough money to start paying the balance of your loan off again. And private student loan negotiations often are easier to make than federal ones.

Federal Student Loan Settlements Are Possible

Although rare, it is possible to negotiate or settle for a loan from the federal government. It is in the Department of Education’s power to provide settlement offers; however, it is uncommon.

Mainly, federal loan settlements are unusual because the federal government has other ways of getting the money back – they can garnish your wages or take the money out of your tax refund. Private loan agencies do not have that option.

The three approved methods of negotiating a loan repayment plan for a federal student loan are:

  • You pay the principal and interest, but the collection charges are waived
  • You pay the principal and half of the interest, and the other half is forgiven
  • Or you pay 90% of the total balance, including all products and services

If the federal government agrees to debt settlement and negotiates a lump sum, you must repay the lump sum within a statute of limitations, usually 90 days, for the debt to be forgiven. For any other course of action, the agency needs approval from the DOE to proceed.

Consequences After Negotiations

Once you’ve negotiated your student loan debt and have a new repayment plan, you may think you’re in the clear. You will have a significantly lesser amount to pay, but negotiating your student loan debt comes with a price.

When you renegotiate your student loan payment plan, it will affect your credit. Your credit history will still reflect the default and delinquency, despite the negotiation, for seven years.

Even though you’ve had some of your debt canceled out, you may still have to pay taxes on it. Canceled debt can still be taxed by the IRS, so you will need to fill out a 1099-C and report the settlement when you file for taxes in that year.

Settling with either a private or a federal institution will most likely amount to one lump sum, and you need to pay that lump sum to get out of debt. For many people who live paycheck-to-paycheck, delivering a large lump sum to a debt collector or the federal government would wipe them out completely.

If you struggle to get your basic needs met after making the negotiated payment of one lump sum, you may want to rethink your actions. You don’t want to get out of debt in one area only to find yourself way behind financially in another.

There are alternatives to settling your student loan debt. With private institutions like credit unions and banks, each will have its own set of stipulations. With the federal government, however, you may have alternatives.

  • Income-driven repayment – If you’ve borrowed money from a federal entity, you may be able to negotiate a payment plant that will simply take an allotted amount out of your paycheck.
  • Forbearance and deferment – Applicable at both the federal and the private loan levels, these options allow you to temporarily stop paying. However, depending on the institution and the course of action, you may have to pay interest even if you’re not paying a monthly amount.
  • Loan forgiveness – Rarely, the federal government will forgive student loan debt, but these programs are based on your lender, profession, and employer.
  • Hardship programs – There are national programs like the National Foundation for Credit Counseling that may be able to help you better manage your debt, consolidate debts, or help you get your finances back on track.
  • Refinancing – For some, refinancing will not help dissipate the pressure to pay back a large sum. Still, refinancing can help negotiate a smaller amount on your private student loans in a few cases.

Student Loan Debt

The Final Word

Once you’ve taken stock of your financial situation, the first step in any debt negotiation process is to contact your lender or, if you feel it’s necessary, a tax attorney or debt consolidation program to provide guidance and support.

At T&I Credit Union, we understand that defaulting on debt can happen, and we want to help you make the best financial decisions for your situation. Contact us to learn how to refinance your student loan debt before it becomes an emotional and financial burden.

About Mary MacInnes

Mary MacInnes grew up in the Northeast and attended school and graduate school there. Professionally, she's been a professor, novelist, and writes for law and finance blogs. In her free time, she likes to travel and read tax laws.

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