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How to Settle a Private Student Loan

How to Settle a Private Student Loan shown as a grad holding out money

Updated: Oct 23, 2014

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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  • SS
    Jun, 2014
    Steve
    What is the SOL in California? When does the clock start ticking on that?
    0 Votes

    • BA
      Jun, 2014
      Bill
      Read the Bills.com article California Statute of Limitations for a discussion of that state's statute of limitations rules.

      For the benefit of readers in other states, see the Bills.com resource Statute of Limitations on Debt page to learn consumer statutes of limitations laws for the 50 US states and the District of Columbia.
      0 Votes

  • SA
    Jun, 2014
    Sarah
    I have 2 Private loans through Sallie Mae that have been in charge off status since February of 2009 (filed bankruptcy in Sept 09 but they weren't included). I haven't made any payments, haven't been contacted by anyone and it doesn't look like its been sent to a collections agency or sold bc it is still listed under Sallie Mae on my report. The balance on my credit report keeps accumulating but its been over 5 years. I want to resolve the issue but should I wait until the 6 or 7 year statue of limitations runs up and then work on it? I live in Arizona. Original debt was $48k, it is now accrued to about $83k on my credit report.
    0 Votes

    • BA
      Jun, 2014
      Bill
      I can't give you legal advice, but will share my thoughts about what I would do were I in your situation.

      I would not contact Sallie Mae, given that the six year SOL in AZ for a written contract is relatively close to being reached. Doing nothing doesn't guarantee not being sued, buti f you shine light on yourself it's likelier to draw attention to the matter. It increases, in my view, the chances of being sued before the SOL passes. I would sit tight and see if the SOL passes.
      0 Votes

  • PK
    May, 2014
    PA
    I have federal loans (~$40K) and a private loan (now up to ~$22K) serviced by Sallie Mae. Because of my financial circumstances my federal loans are in IBR, but I just defaulted on my private loan. When I took out the private loan in 2003 it was $10K, but my health made me be in and out of school and work, and now I'm on disability. I couldn't afford the $170 payments Sallie Mae wanted and their representatives were of no assistance, so I sent $20 a month to at least show an effort to pay the loan. But now, I've reached default and I'm worried. I know about disability discharge, but despite my condition, I doubt I would be approved for TDP. I also know that they can't take my disability here in PA, but my grandparents cosigned for the loan. A collection agency (NES) has started making calls (3 in one day to my grandparents!) and I don't want my family to be penalized for the hurdles I've had. Do you think the collection agency would be willing to settle my loan? Smaller payments or a lump sum? Should I call or have a lawyer do it? Record the call? Legal papers?
    0 Votes

    • BA
      May, 2014
      Bill
      I don't have good news for you. As I think you suspect, loan co-signers have liability for repaying a loan. If Sallie Mae or its collection agent can't wring payments out of you, they will try to do so from your co-signers.

      You mentioned a disability. Some permanently disabled people can continue to work, and some cannot. Customarily, private student loans do not have a cancellation provision if the borrower becomes disabled and unable to work. However, student loans can be discharged in bankruptcy if repaying the loan is an undue hardship. The definition of an undue hardship is evolving. Your disability may result in what a bankruptcy court considers an undue hardship.

      What to do? Consult with a bankruptcy lawyer who has had success in discharging student loans. Bankruptcy lawyers are a dime a dozen, so to speak, so be sure to shop around to find one who has experience with student loans.
      0 Votes

  • CG
    May, 2014
    Charles
    I have a private student loan of $24,000 that is delinquent $21,000 but does not mature until November 2014. I am currently on a payment plan paying $200 a month but was told that the plan was only to keep me out of collection. So regardless if my payments are on time every month I will be still be reported negatively to the credit bureau unless I pay the $21,000. Obviously I cant pay that if I'm needing to be on a payment plan now. I'm currently trying to buy a house and this is the only thing on my credit stopping me. I was going to offer a settlement but first wanted to know a good place to start and the proper way of going about this. I live in Texas.
    0 Votes

    • BA
      May, 2014
      Bill
      One advantage you have is that Texas has very strong protections for wages. That means if you default and the creditor were to sue you, even with a judgment against you, your wages could not be garnished (by this type of creditor). That gives you greater leverage to negotiate a settlement. The creditor may or may not be open to settling the debt, but you have nothing to lose by trying.
      0 Votes

  • CN
    May, 2014
    CT
    I have 72k in private loans & 60k in federal loans. I've been aggressively paying back my federal loans because I have a PLUS loan that is 8.25% (auto pay) and over the past 2.5 years I was able to bring it down from 74k to 60k. I went to a professional school but did not graduate w/a degree and am now luckily working in a corporate setting. When I left school though, I accumulated a lot of interest and it capitalized once I got the job and started making payments. I've been trying to pay as much as a I can each month and in terms of disposable income, I have only 500 to spend on myself each month (phone, gas, food) --whereas 1440/month goes into paying the loans. I live with my parents but give rent. I can't keep doing this since now I'm over thirty, single, I don't own property, and I drive a really old car that gets me to work everyday. I am making good money which is the only reason why I can pay these loans but I want to enjoy my life too. I want to see if I can settle my private loans. Each month now I pay only the interest of $197.04 for the past 3 or 4 years (I have been delinquent in the past when I didn't have a job). I recently tried to pay into the principal but it's only been about 70 dollars this year. I do have some money in my 401k and I'm willing to take it out, suffer the penalty, and pay back the private loan in a lump sum, if its something around 20 to 30 cents to the dollar. Since I have not been delinquent recently, do you think a settlement is feasible?
    0 Votes

    • BA
      May, 2014
      Bill
      Fellow readers of Bills.com and others who report lump-sum settlements of private student loans generally are very delinquent or can show a hardship. Your circumstances do not match either condition. However, it never hurts to try. Open a negotiation with your private student lender or servicer, and learn if it is open to a settlement.
      0 Votes

    • CN
      May, 2014
      CT
      But I do think I have a hardship because I'm living paycheck by paycheck. And the money that I give to my parents as "rent" is not really rent, its to help pay for our house mortgage. I help my parents a lot with their finances because they are in a worse situation than I am and I also bear the responsibility. We have two houses, one we've been trying to sell for the past 6 years but now its worth 100+k less than what we borrowed for it. Just because its not in my name doesn't mean I don't take responsibility for it. Do you think they will take that into consideration? At the same time, we're getting more and more into credit card debt. In my name I owe $10,000 to the credit card company. Also, I have auto payment set up for the private school loan. If I were to stop paying it, would they still be able to take money out of my account?
      0 Votes

    • BA
      May, 2014
      Bill
      I may agree you have a hardship, but I'm not the one you need to convince. Open a negotiation with the lender, and lay out your argument for a hardship as you did here. If you meet the lender's standard for a hardship, then your chances of a successful negotiation will be high.
      0 Votes