Know The Rules And Numbers
As with most things, once you take out student loans, there’s no going back.
The best place to start is familiarizing yourself with the rules of your specific student loans, said Carolyn McClanahan, founder of Life Planning Partners in Jacksonville, Florida.
“Now that you have school loans and you’ve got to deal with them, it’s important to understand what types of loans you have,” McClanahan said. “There are federal loans and then there’s private loans, which are very different.”
If you take out federal loans through your university or college, make sure to be familiar with the loan provider and access their website to track how much you owe while you’re in school same for your private loans.
With your federal loans, McClanahan said familiarize yourself with the types of loans you have which can include direct subsidized loans, direct unsubsidized loans, parent PLUS loans and graduate PLUS loans.
Subsidized loans are for undergraduate students only and are based on financial need, according to the Federal Student Aid office. They are beneficial to the borrowers because the federal government pays the interest for you while you’re in school at least part time and for the first six months after you graduate.
Unsubsidized loans are for undergraduate and graduate students, and they are not based on any financial need, according to FSA. But the borrower is responsible for paying back interest on the loans.
How Student Loan Settlement Works
When trying to settle debt, you will make an agreement with your lender on the amount youre willing to pay. You can either work with a debt settlement company that will negotiate on your behalf, or go through the process on your own and attempt to settle directly with your lender. Generally, the process of debt settlement works as follows:
- You dont pay on your loans for several months.
- Then, those loans go into default.
- Once theyre in default, lenders will negotiate the settlement.
If your loans are in default and you have a big amount of cash saved up, your lender might be willing to settle, Justin Nabity, CFP and founder of Physicians Thrive, told The Balance. While some lenders might be willing to settle 50% of your loan, others may require somewhere around 90% of it.
If you pursue student loan settlement using this strategy, theres no guarantee that lenders will agree to settle your debt. Also, theres a chance that theyll garnish your wages or even sue you, so proceed with caution and weigh all of the factors when considering student loan settlement.
Getting A Forbearance To Temporarily Stop Paying Off Student Loan Debt
With loan forbearance, your loan holder gives you permission to stop making payments for a set amount of time or permits you to temporarily make reduced payments. Common reasons supporting a forbearance include poor health, unforeseen personal problems, your inability to pay the loan within ten years , or monthly loan payments that are more than 20% of your income.
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Can You Settle Student Loans In Good Standing
You cannot settle federal student loans or private student loans that are in good standing. With both federal and private loans, a student loan settlement doesn’t become an option until you enter loan default â and that can take up to 270 days.
Of course, if you have good credit, the last thing you want is to have late payments reported to the credit bureaus â especially if you have a cosigner. But unfortunately, lenders aren’t willing to get rid of the accrued interest or collection charges if your loan is in good standing. From their perspective, it doesn’t make business sense to offer a discount for you to pay your loans early. The lender makes its money by collecting on the interest you pay each month. The longer you take to repay, the more money your lender makes.
The inability to get a settlement while your loans are in good standing is one reason why borrowers consider a strategic default. However, missing student loan payments isn’t without consequences.
Consequences of defaulting on federal loans:
- tax refund offset
- Social Security benefit offset
Plus, you’ll lose eligibility for student loan forgiveness programs, income-driven repayment plans, and new federal student aid. Finally, your name will be listed in CAIVRS and you won’t be able to borrow a mortgage from the federal government. So before you strategically default on federal student loans, make sure you know the consequences.
Consequences of defaulting on private student loans:
Negotiating A Repayment Plan
Private student loan lenders who dont want your loan to go into arrears or be charged off may agree to a new plan that lowers your monthly payments. Contact your lender directly to find out what they can do. Still, some may be unwilling to negotiate a new repayment plan unless your loan is in default.
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Student Loan Settlement: Are You Eligible To Pay Less Than You Owe
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Student loan settlement could be wise in extreme cases, however, such as when:
How Can I Refinance Or Consolidate My Loans
You can apply to consolidate your loans by using the form available at Federal Student Aid. A consolidation servicer will communicate with you about any loans eligible for consolidation or let you know if additional action is required. You must continue to make payments on your loans throughout the process.
If you choose to refinance your loans through a private lender, be aware that you may lose the right to certain protections federal loans offer even though your interest rate may decrease.
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Who Can Help You Negotiate Student Loans
While you can negotiate with a loan holder on your own, doing so can be intimidating. If youd like help, here are a couple of options to consider:
- An attorney: There are many lawyers who specialize in student loans. One of these attorneys can help you decide if settlement is a good fit for your situation and might also be willing to discuss it with your loan holder.
- A debt settlement company: You could also think about working with a for-profit debt settlement company. Just keep in mind that these companies often charge fees for their services usually 20% to 25% of the settlement amount. Also note that many of these companies will encourage you to stop making payments while they try to negotiate with your loan holder, which could severely damage your credit.
Watch out for scams!
- Promising immediate relief
- Wanting you to pay money upfront
- Asking for your Social Security number or other personal information
- Claiming to be affiliated with a government agency
- Using high-pressure sales tactics
- Wanting you to sign a form to give them power of attorney
Go with your gut if what a company is promising seems too good to be true, it probably is.
Student Lines Of Credit
If you have a student line of credit through your financial institution, you’ll have to pay the interest on the amount of money you borrow while youre still in school.
After you graduate, many financial institutions give you a 4 to 12-month grace period. During this time, you only have to pay the interest on your line of credit. After this period, youll pay back your debt through a repayment schedule agreed upon with your financial institution.
Contact your financial institution to get information about paying back your student line of credit.
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Adjusting Your Repayment Plan
As you pay down your debt, you may experience life changes that necessitate adjusting or changing your repayment plan. You can change your plans as needed, but you must meet each programs requirements and still have time left in your payment terms to qualify for any adjustments. Be aware of the advantages and risks of changing your repayment plan.
- Standard repayment plans are created to ensure loans are paid off within 10 years, but this doesnt work for everyone.
- Income-driven plans, such as IDR, ICR and REPAYE are tethered to your income levels, and debt owed after 2025 years is forgiven.
Things to keep in mind:
- Income-driven repayment plans require you to certify your income levels annually. Not doing so on time could cause payments to go back to the standard loan rate.
- Any forgiven outstanding student loan balance left is considered taxable income, which means you must plan for a higher tax bill, an offer-in-compromise, or to set up a payment with the IRS, depending on your financial circumstances.
- Some plans may reset your terms. Make sure to ask your servicer about this when discussing any repayment adjustments.
- Nonfederal loans often do not qualify for these repayment plans. You must contact your lender/servicer about these directly.
Is Chapter 7 Better Than Other Debt Relief Options
We mentioned a couple of ways that Chapter 7 would be better than other debt relief options above. Even though some people consider bankruptcy more of a last resort, you should not think of it that way. Ways that filing Chapter 7 may be the best debt relief option for you include:
Usually takes less than 6 months. Chapter 7 can eliminate most of your debts within four to six months without any payments to the creditors.
The creditor canât continue collection efforts after you file your Chapter 7 petition without court approval. This means all the phone calls have to stop!
Stop collections and harassment. Creditors are not permitted to collect discharged debts. A creditor may face severe penalties for violating the discharge order.
Stops wage garnishment. A Chapter 7 bankruptcy case stops wage garnishment, debt collection lawsuits, and other forms of debt collection.
Erases deficiency judgments. If you choose to surrender your car or house because you cant afford the payments, a creditor cant obtain a deficiency judgment.
Doesnât have to be expensive. Your costs for filing a Chapter 7 case may be very low if youâre eligible to use Upsolveâs free bankruptcy filing tool and file bankruptcy without a lawyer.
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How Student Loan Debt Settlement Works
Under our student loan debt settlement program, a licensed attorney contacts your student loan lenders and begins a negotiation process to significantly reduce the interest AND principal the lender claims is owed. At the end of a successful student loan settlement, the borrower ends up paying only a fraction of the original balance claimed by the lender. The rest of the debt is forgiven by the lender and the settlement is a full and final settlement of the debt, leaving the borrower without the burden of student loan debt going forward. All of this is done without filing bankruptcy.
What Is Student Loan Debt Settlement
Student loan debt settlement is the act of settling your student loan debt for less than you owe. Depending on your loan and lender, you may be able to negotiate a settlement agreement if you have a lump sum of cash saved.
Settling your student loans may be a smart idea if youre in default and have the means to pay off a decent chunk of your debt immediately. Keep in mind, though, that not all lenders will settle loans, nor are they obligated to do so.
Borrowers tend to opt for settlement because it helps them avoid alternatives such as filing for bankruptcy and save money on their loans. However, the exact amount youll save will depend on your lender. While many will require that you pay around 90% of what you owe, some may settle for much less than that.
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Negotiate The Settlement Terms
If you have private loans, compare the offer you receive with your ability to pay. If they ask for more than youve got, you can make a counteroffer. Let them know what youre able to pay.
But note that lenders generally wont accept less than 50% of what you owe. Even then, theyll expect a lump-sum payment for a discount that steep.
You also need to substantially prove that if they attempt to sue you, they wont be able to collect more. This is where that documentation you collected comes in. Explain that you defaulted for financial hardship, and submit your paperwork for the lenders review.
When it comes to settling federal student loans, the road is difficult. Federal loans are rarely settled because there are repayment options to help you get them out of default, particularly for struggling borrowers. These avenues include consolidating your loans and repaying them under an income-driven repayment plan.
However, if youve already defaulted on your loans once and gone through the process of student loan rehabilitation , you may be able to settle them since you can only rehabilitate your loans once.
You may also be able to settle your loans if you can prove you cant pay the balance in full but have a large enough lump sum to pay most of it. Remember, the least the ED usually settles for is 90% of the balance, and you must pay the total settlement amount within 90 days of the agreement.
Who You Need To Repay
You may have loans or lines of credit that you need to repay to the government and/or your financial institution.
In some provinces and territories, Canada Student Loans are issued separately by the federal and provincial or territorial governments. This means that you could have more than one loan to pay back.
Verify your contracts to determine where your debt comes from and where you need to repay it.
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We Reduce Private Student Loan Debt
When you enrolled in college, you probably thought you were making an investment in your future, and you were. What you hadnt planned on was that the economy would tank, jobs would disappear and your student loans would become a huge burden following you around for the rest of your working life. Unfortunately, that is the reality many find themselves in today. With the economic downturn and recessions of the 2000s and 2010s, many went to college or pursued higher education to help their chances of landing a good paying job. Consequently, student loan debt has soared, higher than ever before. In particular, many were forced to take out higher interest rate private student loans, not backed by the federal government. Some less scrupulous schools lured people into education programs with promises of high paying jobs that never materialized. With tuition costs also soaring, private student loan debt has ballooned to crisis levels in this country. If you find yourself with less income than you anticipated and unable to keep up with student loan payments, there is help with an attorney negotiated student loan debt settlement.
Some Debt Settlement Companies Are Untrustworthy
Finally, we need to talk about the risk of working with debt settlement companies. We mentioned previously that there are unethical firms out there. They promise you the moon but actually end up putting you deeper into debt.
The best defense is to research any firm youre thinking about hiring. The Better Business Bureau and your states attorney generals office are two invaluable resources for finding complaints that might indicate a company isnt on the up and up. Knowing some of the red flags that indicate a potential scam can also help.
For instance, if the company claims it can settle any type of debt, thats a good indicator that it cannot be trusted. If they claim they can settle your debt for pennies on the dollar, thats another sign that you need to avoid them. If they ask for your banking information or credit card number, thats also a good sign this company is actually a predator in disguise.
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Can You Settle Your Student Loan Debt
No one takes out student loan debt expecting theyll have trouble paying it later. In fact, most borrowers go into college expecting a good job to come out of it. You put in all that hard work, and then what? Sometimes, plans dont work out as intended. Life gets in the way, as well as the economy and other factors.
Currently, 44 million Americans owe over $1.53 trillion worth of student loan debt. Thats the second highest debt out there today. The worst part is, the debt keeps piling up. Every year, more than one million students go into default when they cant pay. To go into default, you have to miss over a years worth of payments.
Going into default is a nightmare for anyone with student loan debt. Even though youre not paying, the interest continues to climb. That means the total you owe grows with each passing month. Not to mention, your credit takes a massive hit. If you had hoped to buy a house or get a new auto loan, think again. Going into default cancels all of that out.
If you think bankruptcy is the answer to solving your student loan debt problem, think again. Only in extremely rare circumstances will it be discharged for that reason. This is one debt that if you owe, youll have to pay it back regardless of your circumstances. But, there is one option that might help you.