How to Settle a Private Student Loan

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Settling a debt successfully
HIGHLIGHTS
  • Settlements on private student loans are rare.
  • Unless there is a hardship student loans cannot be included in bankruptcy.
  • Borrow from a friend or relative, or consider a peer-to-peer loan.

What to Offer a Collection Agent to Settle a Private Student Loan

Today, negotiators do not know nearly as much about negotiating private student loan debt as they do settling delinquent credit card debt. However, some of the lessons learned in credit card debt may apply to private student loans.

What does credit card debt have to do with delinquent private student loan debt? A great deal. Both debts are unsecured by a vehicle or a piece of real estate. Both were lent by private lenders not involving the federal government. Both follow state statutes-of-limitation and collection rules. State courts look at student loan debt the same way they do any other unsecured debt. The only difference separating unsecured consumer debt from private student loans is that student loans cannot be discharged in bankruptcy, generally speaking.

Debt Settlement Amounts

Bills.com’s partners have several years of experience in negotiating settlements for credit card, medical debt, and similar types of consumer debt. Consumers have an idea of what to expect when negotiating delinquent credit card debt. It is common for credit card issuers and their collections agencies to settle a delinquent balance with a borrower for 40 to 60 cents on the dollar.

Quick Tip: Check the Dept. of Education’s National Student Loan Data System (NSLDS) to see if the loan is federal. State statutes of limitations do not apply to federal loans, and are subject to collection indefinitely. Student loans not backed by federal grants or guarantees do not appear in the NSLDS, and are therefore private. Private student loans are subject to state statutes of limitations.

Because settlements for student loans are relatively new, there is much less collective experience among Bills.com partners in settling private student loans. We can make the following inferences about private student loan settlement based on its similarity to credit card and medical debt.

Collection agents can work on behalf of the original creditor, or buy collection accounts from the original creditors. When collection agents buy a collection account, which is common today, they do so for pennies on the dollar. Depending on the age of the account and the amount of documentation included in the collection account file, some collection agents are willing to accept 15 cents on the dollar for a lump-sum settlement on an old account. On new collection accounts, the settlement amount for credit cards is 40 to 60 cents on the dollar.

Why Private Student Settlement Offers May Differ From Credit Card Debt

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Public Service Loan Forgiveness

As of 1998, student loans cannot be included in a bankruptcy discharge, unless there is a hardship such as a disability. This would imply that private student loan settlement amounts would be greater, as a group, than credit card or medical debt. There are two examples that lead to an opposite conclusion.

Some IRS and state tax debt cannot be included in a bankruptcy filing. The IRS and state governments have the right to administratively seize the balance of financial accounts and garnish wages and Social Security benefits, and intercept tax returns. Even with that much power, both the IRS and states offer tax settlement programs where delinquent tax debt is slashed dramatically if the taxpayer meets government standards for financial hardship. In some cases, the IRS settles debt for pennies on the dollar.

Mortgages are another contrary example. Mortgages and lines of credit are secured by the borrower's real property. When negotiating a lump-sum settlement on a delinquent mortgage, the risk to a homeowner is, of course, foreclosure and property loss. Nevertheless, servicers of defaulted second mortgages will accept 25 to 40 cents on the dollar for lump-sum settlements.

Student Loan Settlement Offers

Let us assume that, all other things being equal, a private student loan collection account is worth more than credit card collection account because of the bankruptcy exemption. However, when we talking about accounts that sell for pennies on the dollar, is "a bit more" two or three cents or a dime? We do not yet know the answer to that question.

Start settlement negotiations at about 25 cents on the dollar for a lump-sum private student loan settlement and work up from there. Read the Bills.com resource negotiate debt to learn tips and tactics for dealing with debt negotiations.

If you do not have a lump-sum to make an offer, it is unlikely you will be able to find a bank or credit union to help you in this regard. Your alternatives are to borrow from a friend or relative, or consider a peer-to-peer loan.

Readers, if you have experience negotiating a private student loan settlement, please share what you learned in the comments section below.

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Comments (84)


Jim G.
Jacksonville, FL  |  March 14, 2014
Hi Bill, I had a citi student loan that was sold to Discover. After Spring 2013 Semester, I took an internship for a company that ended up turning into a Full-Time flexible position so I could finish school. Problem is that Discover scheduled a first payment on my loan for May 25, 2013. 25 days after I finished my last final of my JUNIOR year. I had to take the Fall Semester off because I didn't return to Florida until after it began. I didn't receive any calls/letters from Discover the entire summer or fall, then I get a letter in November that says my loan was charged off. I called them immediately and they said I used my grace period while I was in the military. I don't understand how they can start a payment because I didn't sign up for summer classes. I never ran into that problem before. I agreed to pay $240 month for 6 months to Discover and he said it would be revisited. Do I have any recourse? Any advice would be a Godsend!!!!
Bills.com
March 28, 2014
Your tools available are the contract you signed when you applied for or accepted the loan, your words, and your money. Go back to the beginning and review the contract to understand your deferment and payment rules. Don't assume Discover will interpret the contract to your benefit. Consult with a lawyer about this issue. Your campus may have a pro bono service for students who have basic, civil questions about the law.
Melinda D.
Panama City Beach, FL  |  February 27, 2014
I have Private student loans through Sallie Mae and had a great payment history until 2008 when the economy declined and I relocated and was unable to find a new full time job. Since then my payments had been somewhat consistent until this past year. Life moved on and I'm married now with 2 children. I tried to get my payments lowered but they refused to lower them and I needed a lot of dental work that would cost a few thousand!! So, the loans went into default and now today was the last day to pay Sallie Mae before it would go somewhere else. I had offered them $7,000 (our entire tax return) on the $27,000 I owe and they refused. My mother is the cosigner and I'm very concerned about this effecting her. I'm hoping I can make another settlement with the new creditor and avoid any action against my mother. Would it be best to have my mother contact the new creditor to offer them the settlement? How can I find the new creditor to get on this before they get to my mom?!
Bills.com
March 10, 2014
You cannot find the collection agent who eventually buys rights to collect your account immediately. The debt-buying system is not set up that way. Eventually, if it chooses to do so, the collection agent may report this collection account to your credit report, but that is not a 100% certainty.

Let's step back a moment. It is likely Sallie Mae will eventually sell your account to a broker, who then sells it to a collection agent. We don't know the going rate for student loan accounts, but the typical collection account for a new credit card debt costs a collection agent about 10 cents on the dollar. If that's the amount for student loans, then there's your starting point for negotiating a settlement for your private student loan.
JIll B.
Edmond, OK  |  February 22, 2014
I have a private student loan in default of $31,000. The negotiator tried to get me to pay $20,000. That's a joke b/c I don't have that kind of money. He then offered if I pay $8,000 and my cosigner pay $8,000 it will be done with. Neither of us have that kind of money. I am going to start sending $50 per week to them in good faith to see if they will at least stop harassing me. At what point with they take me to court? I know that they cant garnish wages without a judgment. When will they take me to court?
Bills.com
February 24, 2014
When did you make your last payment on this private student loan? In which state do you reside?

Consult with a lawyer before paying the collection agent or original creditor one thin dime. The statute of limitations may be in play here, and your making a voluntary payment may restart the statute of limitations clock.

As you mentioned, a private student lender must obtain a judgment before it can garnish your wages (if your state allows wage garnishment), levy your bank accounts, place a lien on your real property, or seize your personal property. It is impossible to predict if or when a private student lender may file an action against you.
Kate M.
Denver, CO  |  February 04, 2014
Thank you for writing on this topic. I have a question that doesn't fall into a traditional category. I will preface this by saying that I am not in default on my student loans, nor have I been in the past. The student loans that I am concerned about are three (one for each of 3 years) private loans from undergrad. They are serviced by AES. One is still owned by the original bank; however, the other two were sold by the same bank to NCT. I am about to leave for Peace Corps and would like to see if I can negotiate a settlement on one of the two smaller loans (the two NCT ones). One of my graduate school professors said that he had been able to negotiate a settlement for one of his student loans without it being in default first. It should be noted that he is a professional negotiator.
Bills.com
February 05, 2014
I don't see a direct question in your comment, so I will assume you are asking if it is possible to negotiate a settlement when not in default. You have anecdotal proof, based on your professor's experience, that it can be done. However, it is not easy to do. You have to convince the creditor that it is better off taking the lump-sum than trying to pursue other collection methods against you. You have nothing to lose by trying, aside from some time. Good luck!
Jessica B.
Plymouth, IN  |  January 29, 2014
Hi. I'm not sure if anyone will be able to help but, I just got off the phone with chase for a settlement on my 2 of my 4 private student loans. They said the bank offered me a $23,000 lump sum settlement. these 2 loans are 32,836.65 total. They said that if I couldn't pay it they would go the next route but wouldn't tell me what that was. I have been out of work for 2 years and have yet to be hired, even with my Bachelor's degree. I am working on my Master's which is at least holding off my federal until I do get a job which I hope is VERY soon. I don't understand how the statue of limitations works or if I would be able to use that or not. I made a small payment, after they had me in tears, in November, on one of the loans, but that is all. Do I have options? I cannot come up with $23,000 for a lump sum. My co-signor is my husband so it only will affect the two of us. We have already filed bankruptcy and is has been completed so this is our last problem debt that we wantt o pay but we just cannot afford to with one income right now. Any advice or direction would be greatly appreciated. Thank you.
Bills.com
January 29, 2014
Jessica, unfortunately, there are not a lot of great options. It is understandable that you can't come up with a $23,000 lump-sum. If you can't work out something with Chase, however, they can pursue a lawsuit against you and your co-signer husband. That could lead to a wage garnishment consistent with the collection laws in your state. Check the chart on our state collection laws page, to see what can be taken in your state. It could be that a garnishment would be less severe than a payment that Chase would agree to.

You asked about the statute of limitations. Private student loans are subject to SOLs, but you restarted the clock on the loan on which you made payment. For the other loan, check to see the date of last payment and see what the SOL is in your state. Don't make any payment on that loan until you determine the SOL.
FYI, PhD in Social Science D.
Chicago, IL  |  January 21, 2014
How does in-school deferment affect the tolling of PRIVATE student loans? Specifically, the loan was originated in September 2006 with Sallie Mae, and was under an in-school deferment for nearly 3 years. I then made a payment in between by M.A. and Ph.D. programs, so my last payment date reflects August 2009. The loan has since been under in-school deferment during my full-time Ph.D. program (August 2009-June 2014). Does the SOL "tolling" start as of the last payment date, or as of the date the in-school deferment is lifted? (FYI, in-school deferment is automatically applied via the Clearinghouse, so I have not had any direct activity with this loan since August 2009). Thank you for your generous help.
Bills.com
January 31, 2014
I think Sallie Mae could convince a court that the statute of limitations clock would start when you breached the contract. Here, if you signed a deferment agreement in (using made up dates for the sake of argument) January 2010 that you would start to repay the loan in January 2012, and then never did, the statute of limitations clock would start in January or February 2012.

All of that said, I answered your question without reading your Sallie Mae deferment contract. Take your contracts and other loan documents to a local lawyer, who will read them and give you more than guess.
Shil C.
Bensalem Township, PA  |  January 20, 2014
He has a house under his name , which is still in mortgage ! . But do you really think they will go after anything . If I make an offer after one or two years of not paying the loans . Wouldn't I have the chance to negotitate right away ? If I or him don't have money or bank accounts . What would you do as me ? If I really don't want to pay so much interest and fees. I just have to pay because of co-signer ?...thanks
Bills.com
January 21, 2014
Predicting a collection agent or original creditor's behavior is difficult.

It is possible they will pursue your co-signer and he will end up with a lien on his house. You could try to negotiate in one or two years, but there is no way of knowing if the creditor will be willing to settle until you try it. Part of it may depend on how much equity there is your co-signer's home. You ask what I would do in your position. I would continue to pay back the loan, unless I were not able to do so.
Shil C.
Bensalem Township, PA  |  January 11, 2014
I have $30k worth of student loans. I have been paying for almost 5 years I have paid extra $7k and the loan balance always stays the same. I read the loans term I would have to pay $60k in next 15 years in total. I'm planning to move out of country in 5 years . Also, I have a co-signer who is retired and collecting Social Security. I was thinking to default on my loan and then negotiate a lump sum settlement after 2 years. I don't have good credit and I don't care about my credit score. Do you think they will go after my co-signer right away before I get a chance to settle the debt? Please advise me if it's a good idea to pay it off soon and maybe save some money?
Bills.com
January 12, 2014
There is no certain way to know how a creditor will react, but I would guess that they would go after your co-signer, if you default on your loan. If your co-signer's income, bank account, and assets are not attachable, then your chances of negotiating a settlement increase (provided that you also don't have income, bank accounts, or assets that would be easily attached). We know that your co-signer's Social Security income is protected, but I can't comment on the other holdings he or she may have.
Jes P.
Leesburg, VA  |  January 11, 2014
Does the statue of limitations apply to the state you reside in or the state you got the loan in?
Bills.com
January 13, 2014
The answer to your question is "both may apply, depending on the facts." Read the Bills.com article Which Statute of Limitations Applies to Your Situation?, which will help you work through this legal puzzle.
Michael D.
Sterling Heights, MI  |  December 26, 2013
There is a private student loan I am dealing with that Chase charged off nearly 4 years ago. The loan is nearly $20k and RTR sent me a letter in the mail regarding the account and said they were willing to settle for 10% of the debt in one lump-sum payment. They would also send me a tax form in the mail regarding the settled difference as a source of income. The loan was signed in TN and I currently live in MI. This offer almost seems to good to be true. Yes the loan is older and was charged off years ago but the SOL for private student loans in both states in 6 years. I also pulled my credit report and the charge off is on there but nothing regarding a CA picking up the debt. Also if the debt is resolved would it reset the length of time the negative impact is on my credit reports? Any suggestions about this situation would be greatly be appreciated.
Bills.com
December 26, 2013
I understand your skepticism, due to the low-dollar settlement offer you received. However, it sounds legitimate.

You should validate the debt, to confirm that they have the right to collect. It seems valid as you know you owe such a debt and the SOL is not yet expired. The fact that the CA is not listed on the credit report does not mean that they have no right to collect on the debt.

If you settle the debt, it should still fall off your credit report 7 years after the date of first delinquency. Your payment to settle the debt does not restart the clock on how long the derogatory mark stays on your credit report.
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