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How to Settle a Private Student Loan

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.

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.

Comments (11)


Jarrod S.
Evansville, IN  |  May 05, 2012
In 2010 i defaulted on private student loans. I owe 12,000 upfront. They told me they want an out of court settlement of 8,000 which i don't have. They are offering a payment plan. They are willing to drop my interest rate from 11.25 to 1%. I need 1000 dollars down and 122 dollars a month. I could do this until i get enough for a settlement. I would take this but i can't find steady work. I feel so down. I'm stuck with these student loans without a degree because itt tech canceled my program. I didn't even get a refund.
Shaneen C.
Philadelphia, PA  |  February 08, 2012
I have a serious problem! I currently have private student loans with sallie mae my payments are 969 a month which i cant really afford because I cant even move out of my parents house by making these payments. I tried to ask them to lower it all they could do was lower it to 764 but that would only last for two years and my payments would end up being 1000+ once the two years are over. So is my best bet filing bankruptcy or is there anything else I could do?????
Bills.com
February 08, 2012
Two ideas:
  1. As of 1998, student loans cannot be included in a chapter 7 bankruptcy discharge, unless the borrower can prove a hardship such as a disability. Talk to a bankruptcy lawyer about a chapter 13 bankruptcy, which may be able to cut your monthly payments for 5 years.
  2. Talk to Sallie Mae about a deferment or forbearance.

Follow the links mentioned to learn more.

Anh P.
Ann Arbor, MI  |  January 25, 2012
I defaulted on a private student loan through AES. The owner is First Marble Head but the collection agency is National Enterprise. The principle amount was $25K. I called to negotiate the debt and told them I was still a full time student graduating in 2 yrs. They said that it was now $39000 with interest, fees, etc. The rep I talked to said that the payoff amount would be $32K and that was the lowest they could go. I told them all I have is $10K. They said that I could pay 7k & make monthly payments of $75 until I graduate and then I could work out another payment plan once I graduate and start working. This is my first negotiation with the collection agency. I thought I would be able to get a better settlement. What do you think of this? Thank you!
Bills.com
January 25, 2012
This is a bad contract, if you shared all of the important terms and conditions in your message. Why? The indefinite amount due in two years leaves you open to repay today's entire balance, plus whatever interest, penalties, and mystery fees the collection agent decides to add later. No lawyer of good conscience would allow his or her client to sign such an open-ended, easy to exploit contract.
Jennifer H.
Whittier, CA  |  December 03, 2011
I had a private student loan with Wells Fargo Educational Financial Services and settled directly with them. I fell behind on payments and they initiated the negotiations. I originally owed $3330 and settled for $1330. And FYI...income tax time I will have to report this and pay taxes on the $2000 difference.
Hakima W.
Twp Of Woodbridge, NJ  |  December 09, 2010
I defaulted on some Sallie Mae student loans and they sold them to a CA called Allied. Allied put a hard inquiry on my CR. They also in creased my interest rate up to 18.9%. So my $21,000 student debt turned into $37,000 worth of debt. It incurs interest at the rate of $202.50 per month and they want a minimum of $458.00. In this economy I work a part time job at the $12 an hour, which is not feasible. They told me they will settle the debt if I pay $25,000. Which sounds good but where can I get that? Especially since this situation has demolished my credit and put a dent in my co-signer's. I was advised to get a loan but who would give me or my co-signer one after the default?
Bills.com
December 09, 2010
Your delinquent student loan debt was not sold to Allied Interstate, Inc. Instead, it was assigned to them for collections. According to the Web site of the US Dept. of Education, "the Department of Education currently contracts with several collection agencies to administer many of the collection activities of our accounts. Only those accounts which fail to establish and adhere to a repayment arrangement are subject to assignment to a collection agency by the Department's Debt Collection Service. Those accounts assigned to a collection agency are assessed additional collection costs."

You are in tough situation with limited options. You are correct that you are unlikely to find a lender willing to give you a new loan to pay off the student loans. Finding a co-signer, from what you wrote, is also unlikely. Lastly, even if owing $25,000 is better than $37,000, you clearly do not have the means to pay the $25,000 to settle the debt.

Have you spoken to Allied and told them that you are willing to make monthly payments, if they are based on what you earn now and what it costs you to live?

If you make no headway with Allied, there are two routes I suggest:
  1. Contact the Federal Student Aid Ombudsman of the Department of Education. That office may help you resolve your problems with federal student loans or point you in the right direction.
  2. Consult with a bankruptcy attorney. While it is very difficult to include a federal student loan in a Chapter 7 bankruptcy, it is not impossible.

You don't have many options. Doing nothing will likely lead to a wage levy of 15% of your income. A garnishment can occur without a court order, though you may receive advance notice before it takes effect.

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Eugene G.
Brooklyn, NY  |  May 12, 2011
Are you having hard time paying off your debt? Have you considered Student Loan settlement option as an alternative?
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Eugene G.
Brooklyn, NY  |  May 14, 2011
Private Student Loans Settlement Option is finally possible.
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Michael P.
Canton, OH  |  August 08, 2011
Eugene: I don't want to say that I don't believe you, but what option are you referring to? I know there has been some changes made to the bankruptcy bill, I believe that no longer protects private student loan debt, but nowhere have I found that to be of real help in negotiations yet. Please elaborate if you wouldn't mind. Thanks.
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