If you’ve been trying to duck your government student loans you should realize that you can’t outrun them forever. Eventually they will catch up to you. If you’ve defaulted on your federal student loan debt — that is, gone at least a year without payments — you may feel as if you have no options other than drowning in debt.
But you may be able to negotiate a settlement with the collection agency to pay less than what you owe, especially if you’ve been in default for years. Debt relief can certainly help you, but don’t expect the type of “pennies on the dollar” settlement you might get with credit card debt.
Financial aid expert Mark Kantrowitz discusses student loan settlement options in his article titled Secrets to Settling Defaulted Federal Student Loan Debts for Less Than What You Owe. Mr. Kantrowitz’s three major suggestions, which he said were based on his own experience in helping students obtain debt settlement help, explain the types of compromises collection agencies can offer without having to get approval from the Department of Education.
Ask for a Waiver of Collection Charges – This adds up to about 25 percent of every monthly payment after you’ve defaulted. If the settlement is a lump sum payment of the amount due, collection agencies will often waive the collection charges, Mr. Kantrowitz said. In such cases, the borrower would just pay the current principal and the accrued, unpaid interest.
Ask for a Reduction – Either a 10 percent reduction in the total amount due or a reduction of half the accrued, but unpaid, interest. Which reduction will lead to a lower payoff, Mr. Kantrowitz said, will depend on your individual situation.
Get the Settlement Offer in Writing – This should be the case with any settlement agreement that you make. If it’s done by a debt relief company they’ll make sure that it holds up legally.
Whether borrowers in default will be able to settle might depend on their income. If you earn enough to pay off the loan normally, for instance, you’re not likely to get a settlement, according to Mr. Kantrowitz. And in most cases, he said, borrowers who have been able to settle have been in default for more than five years and “there just is no hope of that borrower ever being able to repay the debt.”
Even after a settlement, you won’t see a large reduction. You’re likely, in fact, to still have to pay at least 90 percent of the amount owed. “It’s a little bit of a discount – it’s not going to be a huge discount,” Mr. Kantrowitz said.
Make Payments to Yourself – You won’t always need to purchase something. But just because you’re not actively saving for a specific item, doesn’t mean you get to go spend frivolously. Start putting that money into savings instead.
Don’t get me wrong, this isn’t exactly a perfect scenario to make purchases. But it certainly beats being overwhelmed with debt. It’ll keep you on track, secure in the knowledge that you’re planning for you financial future.
