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Private student loan settlement

Private Student Loan Debt Settlement » Student Loan Debt » Private Student Loan Debt Settlement



Debt settlement is a financial process where you work out an agreement with a lender to discharge the remaining balance of your debt in exchange for a partial payment. Essentially, the lender agrees to settle your debts for less than the full amount owed.

What is private student loan debt settlement?

In this case, you are settling private student loan debt – i.e. student loans held by private financial institutions and lenders. This does not include federal student loans backed by the government. You can try to negotiate a settlement yourself or work with a settlement company. In both cases, results can vary widely and are almost never guaranteed.

How do private student loan settlement programs work?

Step 1: Negotiate a settlement offer

First, a settlement offer is presented to each loan servicer (lender) for your private student loans. In most cases, the offer will need to be at least 50% of what you owe in order to be accepted. Generally, the lender will expect a lump-sum payment of that amount.

Step 2: Get a written agreement

Once the offer is negotiated, make sure to get it in writing so you have protection in case they ever come back to collect the balance due.

Step 3: Pay the settled balance

You pay the lender the lump sum agreed upon and they discharge the remaining balance owed.

Step 4: Check your credit report

The discharge will be reported to the credit bureaus, creating a negative item that will remain on your credit report for 7 years from the date of discharge.

How to generate a lump sum settlement

Most people don’t have the funds needed for a lump sum settlement just sitting around. If you receive funds from something like a tax refund of have extra funds from a loan or property sale, then you may choose to use those funds for this purpose.

In some cases, a borrower may stop making scheduled payments and set the money that they would be paying aside to generate enough money for the settlement.

The issue with this is that by not making payments as agreed, you break the contract that you have with the lender. Since you do not make the payments outlined in your loan agreement, it leaves a path open for the lenders to sue you in civil court. This can lead to problems like wage garnishment.

If you work with a settlement company, they may ask you to send the funds to them so it can be saved in an escrow account. Then they negotiate with your lenders once you have enough money saved in escrow to make a reasonable offer. In some cases, settlement companies may pool offers from several borrowers to encourage a lender to accept the deal.

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Does private loan debt settlement work?

This really depends on your lenders, the amount you owe, the status of your debts and the lender. Some lenders may be willing to accept settlement offers while others don’t. In some cases, you can have more success going through a settlement company because they have skilled negotiators working for you.

However, there is no guarantee that a specific settlement offer will be accepted until you get into the negotiation process. This is why it’s often recommended that you retain an attorney to fully inform you of your rights and the risks you may face.

And remember, even private student loan debt can be difficult to discharge through bankruptcy. This means private student lenders may be less likely to settle student loans than other lenders. As a result, you may be better off using Private Student Loan Consolidation. Or you can simply call your lender to see if you can refinance or arrange an adjusted repayment schedule.

What to expect after you settle


Canceled debt is taxable. This means you will have to pay taxes on the portion of your private student loans that you didn’t pay.

Make sure you’re prepared to pay the IRS when the time comes — otherwise, your canceled private student loan debt could lead to tax debt.

Credit score drop

As with any type of debt settlement, your credit score will drop afterward. And the settled debt will stay on your credit report for seven years.

If you aren’t concerned about your credit score, this may not be an issue for you. But if you want to take big financial steps within the next few years — like getting a mortgage — then you may want to rethink your decision to settle.

Review and repair your credit, if needed

Following a settlement, you should review your credit report to ensure the settlement was reported as agreed. The balance on the account should be reduced to zero. The status on the account should show “paid as agreed” or “settled in full”

In some cases, you may arrange in your settlement agreement for more favorable reporting. In this case, a loan may show as “paid in full” or a collection account may be removed entirely if you negotiated pay-for-delete. In this case, you want to make sure the terms of your agreement were followed.

If you see any issue with how the settlement was reported, you may need to take steps to repair your credit.

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Since private loans aren’t federal loans, they aren’t eligible for income-driven repayment plans or programs like Public Service Loan Forgiveness (PSLF).

Private student loan debt consolidation

Consolidation rolls all of your private student loan payments into one monthly payment. Usually, this means a new, lower interest rate, which will save you money over time. Talk with your lender to see if you qualify for private student loan debt consolidation.


When you refinance your private student loans, you can change the terms You can change the length of the term, lower the interest rate, and even consolidate payments.

Refinancing also gives you the opportunity to switch lenders or release a cosigner.

Hardship plans

Some private lenders have hardship plans that help you lower your monthly payments and repay everything you owe. This could save your credit score from the damage of settlement.

Talk with your lender if you’re having trouble making your payments. Most of the time, they would much rather work something out with you so they can collect everything they owe instead of settling for less.

What happens if I just don’t pay?

This is the worst thing you could do concerning your private student loans. With a federal student loan, it takes 270 days (nine months) for your account to default after a missed payment. But for private student loans, it only takes 90 days (three months).

The lender will ask you for the full balance of the loan. If you don’t pay up, the lender can go after a cosigner if someone cosigned the loan for you. Eventually, you could have your wages garnished or even be sued.

Even if payment is getting tough, explore all of your options and never skip a payment without an explanation. The debt will not go away on its own.

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