What is private student loan settlement?
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. This is known as a settlement offer. Essentially, the lender agrees to settle your debts for less than the full amount owed.
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 government-backed loans from the federal government. You can 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?
- 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
- 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.
- You pay the lender the lump sum agreed upon and they discharge the remaining balance owed.
- 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. In many cases, you stop making scheduled payments and set the money that you would be paying aside to generate enough money for the settlement.
The challenge with this is that you effectively stop paying on your loans altogether. This leaves a path open for the lenders to sue you in civil court. This can lead to problems like wage garnishment. So there’s an additional risk involved with choosing this method.
If you work with a settlement company, they may ask you to send the funds to them so it can be saved in your settlement account. Then they negotiate with your lenders once you have a lump sum big enough to make a reasonable offer. In some cases, settlement companies may pool offers from several borrowers to encourage a lender to accept the deal.
Does private loan 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, by law even student loan debt that’s private can’t be discharged by bankruptcy. This means private student lenders may be less likely to settle than other lenders. As a result, you may be better of using Private Student Loan Consolidation. Or you can simply call your lender to see if you can refinance or arrange an adjusted repayment schedule.
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