How to Settle a Private Student Loan

Bills.com Team
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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.
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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 (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

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 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 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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  • ES
    Apr, 2013
    Ellen
    Hi Bills.com, I have two private student loans that I borrowed from Sallie Mae in 2007 for $40,000 at 9.75% interest with no cosigner. I have made consistant payments on these totalling about $10,000 over the last few years. The balance is now $56,000 with interest. I am looking to do a 1 time lump settlement payment. I have not paid anything for 3 months and I am about 3 weeks away from default. What should I do? I offer 60% on the current amount and they refusedd the offer, the best they have offered me is about $45,000. What is a reasonable offer? Is there someone who can help negotiate on my behalf? I am able to pay the entire lump sum. Thanks in advance.
    0 Votes

    • BA
      Apr, 2013
      Bill
      I cannot offer you a satisfactory answer. We as a nation are new to lump-sum settlements for student loans. When it comes to negotiating with credit card lenders and the IRS, consumers have lot of history to look to when negotiating settlement agreements. We are starting to learn more about negotiating mortgage deficiency balances. But there are too few student loan settlements we know of today to understand the rules of thumb for what Sallie Mae and other private lenders accept in settlement agreements.

      You asked what to do. One option is to lay all of your cards on the table with the Sallie Mae negotiator by showing them copies of your financial statements. Explain that $X is all you can afford for a settlement, and that if they ask for $X+1 you simply do not have the funds for that deal. If you reach a settlement, please return here to share the basics of your deal so that other consumers have a notion of how far Sallie Mae wants to go to settle delinquent loans.
      0 Votes

    • DA
      Apr, 2013
      Daisy
      In 2006, I attended a private college. I had a private student loan from AES and owe a balance $2,599. But on 2008, we had a financial crisis and our home went to foreclosure. Since then, I didn't make any payments on my private student loan. It was in default since 2008. Recently on 04/19/13, when I check my credit report, there's collection agency listed on my report was reported potential risk twice, one is on 01/01/13 and again on 04/25/13. So when I called the collection agency, I found out that it was my private student loan. But my private student loan balance went increase from $2,599 to $4,197. According to them, I can make a settlement of 50% to 60% of how much I owe. I told them as of right now, I don't have money to make any payment since I am on maternity leave. They said if I didn't make any payment they can report it to my employment and garnish my paycheck. Can they do that? Will a private student loan be removed from my credit report after 7 years?
      1 Votes

    • BA
      Apr, 2013
      Bill
      We know credit card issuers sell delinquent collection accounts to collection agents for about 8 cents on the dollar. We do not yet know how much delinquent private student loan collection accounts fetch in the collection account marketplace. My guess — note that word choice — is private student loan collection accounts are worth more to collection agents because it is very difficult for consumers to discharge student loans in bankruptcy. However, as I mentioned, that's purely speculation.

      My point for discussing this you may be able to negotiate a lump-sum settlement for less than 50 cents on the dollar. You need not accept the collection agent's opening offer to settle the debt.

      You mentioned your credit report and the 7-year rule. This rule controls how long most derogatory items may appear on a consumer's credit report file. You are in luck: Private student loans follow the 7-year rule, and federal student loans do not. The 7-year rule has nothing to do with your legal liability for the debt. It also has nothing to do with a state's statute of limitations. See the Bills.com resource Fair Credit Reporting Act to learn more about what can appear on a credit report and for how long.

      You mentioned wage garnishment. I will assume you reside in California. See the Bills.com articles California Wage Garnishment Rules and California Collection Laws to learn more about your rights and liabilities as a California resident.

      A creditor of a delinquent debt has the option to file a lawsuit against the debtor. If the lawsuit is successful, the court will issue the creditor a judgment. The judgment-creditor has the right to garnish your wages, levy your bank accounts, and place lien on your property. See the California Collection Laws link I just mentioned to learn details.
      0 Votes

  • BT
    Feb, 2013
    blake
    Had a loan through AES, defaulted and it went to Goal Structured Solutions. Paid them a fee to get reinstated with AES and started making minimum payments again... Recently been approached by National Enterprise Services who said they are seeking a settlement. I negotiated down to 40 cents on the dollar on a 40k private loan. They said they would accept the one time payment and there would be no more pursuit of the total ammount (40k) I'm confused because when I contacted AES about this offer they claim that I still owe them the debt and the loan is with them. I don't know who to pay, obviously the settlement offer sounds intriguing, but neither company will talk to the other. Any advice about whether this settlement offer is legitimate?
    2 Votes

    • BA
      Feb, 2013
      Bill
      If AES owned the loan originally then their voice is the one I’d listen too. That said, I would recommend getting a free credit report and checking to see who is reporting this debt as delinquent. If NES is reporting it, then ask them to validate the debt prior to accepting the settlement (they are required to do this within 30 days of acquiring the debt to give the client a chance to dispute it. They usually send a form letter with current balance and account numbers).

      My concern is that that AES outsourced the debt once (to Goal Structured Solutions) yet may have also kept that account in a portfolio they outsourced to NES, and now have it being collected on by both Goal Structured Solutions and NES. This, unfortunately, is not as uncommon as one would think.
      1 Votes

    • BT
      Mar, 2013
      Blake
      Updated question... So I found out more about my situation. The original lender was Student Loans Xpress and ran their billing system through AES. On my credit report it says that the loans were sent to collection 2/12 by AES and there is nothing after that. Spoke to AES representative who said that because the loan was rehabilitated we can still make payments to them, and that National Enterprise Solutions (NES) was commissioned by Goal Structured Solutions to collect on the debt while it was in default... but "their systems must be out of whack, because the loan has been rehabilitated. He went on to say the letter that NES sent did not authorize them to collect because the lender had recently changed hands from Student Loan Xpress to FCDB NPSL Trust (which I can't find pretty much anything on.) After that, I called up NES. I told them that the lender had changed hands, and they claimed that they are collecting for student loan xpress because they are the original lender and that AES can't rehabilitate loans. He went on to say AES has no authority, only the original lender. My thoughts are very split. On one hand, the credit report reads that AES had the loan, but sent to collections. On the other hand NES inquired about my credit report and sent a letter with my account numbers saying they were collecting for Student Loan Xpress. Any thoughts on best approach?
      0 Votes

    • BA
      Mar, 2013
      Bill
      My best advice is to have contact the original lender to find out precisely to whom they sold this debt. You would then need to dispute the debt with all three credit bureaus with whomever is collecting on this other than the original issuer says they sold it to. Working directly with each entity will probably yield no results as they have no interest in working with anyone that isn't paying them money. However, the credit bureaus will make them prove within 30 days that they own the debt. That is when they'll have to take action by proving they own the debt and realize who owns it and who doesn't. This could take up to 60 days though. Good luck and I hope this helps!
      0 Votes

  • LS
    Feb, 2013
    Liz
    1. Does anyone really get out of Private Loan Student Debt due to the Statute of Limitations? I see many posts warning not to make a nominal payment that will restart the clock, but I haven't seen anyone say they were able to get out of private student loan debt that way. My fiance is approaching 5 years since he went into default and I am trying to help him figure out what his options are. 2. Would statue of limitations start after last payment or the date it went into default? 3. Who is the best person to legal advice from? My fiance took out about 40,000 in a private student loan which now is around 110,000 with interest. Current creditor says it will be out of their control soon because they are the third creditor and Sallie Mae will take legal action soon. They offered $58,000 lump sum to get out but there's no way we can do that. Thank you for any and all advice. Seeing your answers has been very helpful.
    0 Votes

    • BA
      Feb, 2013
      Bill
      1. Yes; people do have private student loans pass the statute of limitations and then can avoid paying, if sued, by raising the SOL as an affirmative defense in court.
      2. The clock on a statute of limitations for breach of contract starts the moment a borrower becomes delinquent on a debt. The clock can be paused if the debtor leaves the country or even the state, depending on state law.
      3. A lawyer is the best (and only) person to turn to for legal advice.
      From the email address you left us, I am assuming that you and your fiance are in Florida. If Florida law is the governing law for his case, then the SOL should be five years. If a lawsuit is initiated against him before the five years pass, then he cannot successfully use the SOL as a defense.

      I suggest that you pull his credit report to try to determine the date of delinquency and then meet with a lawyer. The lawyer can help you determine the date of delinquency, if necessary, and also figure out if it is Florida law that governs this case, if there has been any action that would have tolled the SOL (put the clock on hold), and address any other questions that you have.
      0 Votes

    • LS
      Feb, 2013
      Liz
      Thank you so much for your answers. Yes, you are correct we are in FL. This may be a dumb question but what type of lawyer? It seems like the ones I've tried to contact don't deal much with private student loan debt only other types of debt. Also, in what cases does the lending company not take legal action? In other words, they know the statue of limitations so what would cause them not to take legal action beforehand? Do they base their decision on whether they think they will be able to collect enough to make the legal action worth it? Thank you again for your help!
      0 Votes

    • BA
      Feb, 2013
      Bill
      Consult with a lawyer who has civil litigation or consumer law experience. You are correct that if a creditor knows that a debt is nearing the SOL that they may proceed with legal action to beat the deadline, but it is certainly possible that it may not be aware of the date and will let the deadline pass and fail to file in a timely manner. I agree with you that a creditor could choose not to file against someone they determined was "judgment proof," though they could still sue and see if the judgment-debtor's finances improve during the time the judgment allows them to collect. The larger the debt, I assume, the likelier they are to sue, even against someone whose wages could not be levied and who owned no assets.
      0 Votes

    • LS
      Feb, 2013
      Liz
      Thank you for your quick and thorough response!
      0 Votes

  • MB
    Feb, 2013
    Mike
    I graduated from a University around 10 years ago with about $70,000 in combined federal and private student loans. Around 6 years ago I became disabled and have been unable to work since then. I had been regularly making payments on my loans until about 3 or 4 years ago. Being unable to pay off other mounting debts, I declared bankruptcy 2 years ago. Talking with bankruptcy attorneys and researching on my own led me to believe that trying to get an "undue hardship" bankruptcy discharge on my private and federal loans was next to impossible, even for disabled people. Recently, due to new laws, I was able to get my ~$15,000 of federal student loans forgiven through a Total and Permanent Disability discharge, as I have been disabled for more than 60 months, and will continue to be disabled for the forseeable future. Will I be taxed for this $15,000 in forgiven debt? Do I have to prove my insolvency, or is filling out IRS Form 982 enough? I own no property, funds, or stocks, and do not own an automobile. The remainder of my debt is my private student loan. I have a Sallie Mae Signature student loan with ~$35,000 still owed. I can barely survive on my existing disability payments, and there is no way that I can make any payments on the private loan. I've noticed that Sallie Mae no longer offers Signature Student Loans, and only offers a "Smart Option" private student loan. These Smart Option loans have a death and disability discharge clause in them with standards very similar to the newer federal disability discharge qualifications. Unfortunately, no such clause existed back when I took out my Signature loan, and there was no Smart Option loan back then. My private loan debt will soon be going into default/collections. What are my best options? Is there any way I can get Sallie Mae to apply the death and disability clause that exist on their current Smart Option private student loans to my old Signature loan? If they go into collections, how long should I wait to attempt to negotiate, and what kind of reasonable settlement can I expect to offer/be offered? Does it matter if my father co-signed the private loans? He is currently retired and also disabled. Any information or help that could point me in the right direction would be greatly appreciated. Thank you very much.
    0 Votes

    • BA
      Mar, 2013
      Bill
      You mentioned two issues. Regarding the debt forgiven by the disability discharge, did the lender issue a 1099-C? I doubt they did, but if if they did, consult with a tax lawyer or experienced tax preparer about the Cancellation of Debt Income you would claim in a Form 982.

      Private student loans are especially vexing for a person in your situation because, as you mentioned, it is (or was) rare for private lenders to offer the same disability discharge option one sees in a federal student loan.

      Much is known and understood about the settlement of delinquent credit card debt. By contrast, we as consumers are very early in our understanding of the settlement of delinquent student loans. Bills.com is following settlement negotiations for student loans, but we do not yet have enough information to offer rules of thumb on settlement amounts.

      You mentioned you had a co-signer on your delinquent loans. Generally, co-signers have just as much liability for a debt as the primary borrower. Make sure the settlement you reach with Sallie Mae includes releasing your co-signer from liability.

      You mentioned receiving the advice from lawyers. I agree with that tactic wholeheartedly, especially when negotiating a debt settlement. You can bet the negotiator across the table will have a lawyer review any settlement agreement he or she offers you, and you should level the playing field by receiving your own legal advice.
      0 Votes

    • MB
      Mar, 2013
      Mike
      A follow-up. My ~$35K in loans was split between two private Sallie Mae student loans: one for around $20K that is in my name only, and the other for around $15K that is co-signed by my father. The co-signed loan is regularly being paid and in good standing. The $20K loan in my name only just went into default. I received a letter from the debt collection agency Allied Interstate last week, notifying me that they now controlled my debt. I'm not sure if Sallie Mae sold the debt to the collection agency or if they are just handling the collection duties, does that make a difference (is there a difference)? Their initial offer to settle was around $14K, but obviously I have no money to offer. I am broke, on disability, insolvent, declared bankruptcy 2 years ago, etc. They have already called up and made very rude phone calls to my family a couple of times in the last week, and I sent out a debt validation request letter today. This should temporarily stop them from making collection calls (as long as they follow the FDCPA, but they might not as they're a fairly nasty agency). What I'm asking is if after the debt gets validated and they resume their collection attempts, should I attempt to send them a Cease & Desist letter? From what I've read, a collection agency only has two options after they receive such a letter: to write me a letter saying they will stop trying to collect (and assumedly sell off the debt/let the creditor handle it), or they will attempt to sue me over the debt. If I were to attempt this and they sued me, what consequences would I face? I have no money, and my only income comes from social security. As far as I know, if they won their case they would be unable to garnish my social security disability and supplemental social security payments. If it were a federal student loan, then I would (supposedly) be subject to garnishment of my social security, but I believe private student loans are treated just like any other regular loan in regards to protections against social security garnishment. I'm no expert, but I would appreciate if anyone could help point out other possible consequences that would come from doing this, and whether or not it would be beneficial for me to take this course of action. Thank you.
      0 Votes

    • BA
      Mar, 2013
      Bill
      I agree with your assessment on how the C&D letter should work. The consequence you face if the creditor files a lawsuit against you is a judgment. You are correct your SSDI cannot be garnished by this kind of creditor. However, you face collections on the judgment for as long as the judgment remains in force. If your financial situation changes or if you have a bank account or other valuable asset that could be attached, the judgment-creditor could take action to collect.

      See the Bills.com State Collection Laws page to learn the general rules for your state.
      0 Votes

    • MB
      Mar, 2013
      Mike
      Thanks for the info.
      0 Votes

  • MG
    Feb, 2013
    Matt
    I graduated from culinary school in 2005. I have both private and federal loans. The federal loans are consolidated. My problem is the private loans, which also I have a cosigner. I owe $62,552 and change. Yes, for culinary school. I spoke with someone from the CA months ago and they were willing to settle for $43,000, which isn't possible. I let it go and let it go (huge mistake) and now I have the county sheriff wanting to come inventory my assets. Now I am married in Pennsylvania and have a special needs child. What should I do now? Should I contact the people who now own the loan and set up a wage garnishment? Or am I past that point? Legally I do not think they can put a lien on my property or assets since they are all in both my wife's name as well as mine. Any help would be much appreciated.
    0 Votes

    • BA
      Feb, 2013
      Bill
      Property jointly titled in both your name and your spouse's name are not immune from a lien or writ of replevin filed against you.

      However, one form of real property ownership, called tenancy by the entirety, makes it impossible for a creditor of one spouse to place a lien on property the couple owns in a tenancy by the entirety. However, about half of the states recognize tenancy by the entirety as a form of real property ownership, and of those that do, not all have the lien-insulation feature. Consult with a lawyer in your state to learn if titling any real estate you own in a tenancy by the entirety will protect your joint property from a judgment-creditor's claims.

      You mentioned Pennsylvania. Under Pennsylvania law, wage garnishment is not allowed for consumer debt. Therefore, you are not obligated to consent to a wage garnishment.

      You have nothing to lose by negotiating a settlement with the collection agent. A word of advice: Consult with a lawyer before you sign any settlement agreement, and allow him or her to read the proposed settlement so that you understand the terms and conditions of the contract.
      1 Votes