The payment of student loans can have a detrimental effect on your finances, especially if you do not have the means to repay them. Student loan payments can amount to hundreds of dollars per month, affecting your disposable income and limiting your ability to purchase a home.
Student loans have traditionally been difficult to repay. In most cases, people can’t get rid of them through bankruptcy, so they’re stuck with them until they pay them back.
Many people wonder whether they can settle student loan debt like they can a credit card or loan. The possibility of settling student loans exists in some cases, but it requires a great deal of effort and may result in different results than what you expect.
Let’s explore the possibility of settling student loans and alternative options if settling is not possible.
Who Is Able To Settle Student Loan Debt?

You may be able to settle a traditional student loan through the Department of Education. There will, however, be a lot of hoops to jump through. The Department of Education can stop student loans, and a settlement can be negotiated with you.
Only a few people will likely be eligible for a settlement. To qualify for a loan, you will likely need to demonstrate undue financial hardship and an inability to repay through traditional means.
Your lender may require you to default on your loan before allowing you to settle. Private student loans default between 90 and 120 days after non-payment, while federal student loans default after 270 days.
Your credit report will negatively affect if you default on your student loans. If you default, you will likely have difficulty obtaining a loan or mortgage until the situation is resolved.
To settle your student loans, you must ensure that you have the necessary funds. The balances on student loans often amount to tens of thousands of dollars. You may still owe more than $10,000 even if you can reduce the balance of your loans by half.
In most settlement agreements, a lump sum payment is made to erase the remaining records from the past. Your efforts will fail if you do not have sufficient funds to settle your case.
Student Loan Servicers Are Not Obligated To Accept A Settlement
The student loan servicer is not obligated to accept your settlement offer. Most of the time, there is little reason for them to do so. To enforce repayment of your student loan debt, student loan servicers have considerable legal protections.
Even though you may begin the settlement negotiation process by defaulting on your loan, the servicer does not have to accept your offer. Even if the loan servicer accepts your offer, it may only be willing to accept offers of up to 90% of the total value of your debt, which may result in very little savings for you.
Settling Student Loans Can Impact Your Credit Score

The settlement of your student loan will not improve your credit score. If you default on your loan, your credit score will likely fall rapidly and hard. Your lender may report that you did not comply with the terms of the agreement or that you paid less than the total amount of the loan if you successfully negotiate a settlement.
Upon completion of the settlement, you can rebuild your credit score, but it will take some time. Credit cards, home mortgages, and car loans will likely take a lot of work for you to obtain.
5 Steps To Settle Student Loan Debt
Here are some steps you can follow if you wish to settle your student debt:
- Decide whether you want to settle with a lump sum or monthly installments.
- Make sure you know how much you can afford to pay off.
- Make an offer to the debt collectors.
- An agreement should be negotiated.
- Make sure the debt settlement agreement is in writing.
Now let’s take a closer look at each step.
1. Decide Whether You Want To Settle With A Lump Sum Or Monthly Installments
Consider a lump-sum payment arrangement if you wish to settle your student loan for less than you owe. You agree to pay off the debt in one payment, usually at a percentage of the original amount, by offering a lump-sum payment.
Alternatively, if you are unable to afford a lump-sum payment at the time, you may want to consider setting up a monthly payment plan. Your settlement agreement will likely require you to make monthly payments for several months or years until the balance is paid in full, usually over several years.
In most cases, debt collectors are willing to accept either of these settlement options.
2. Determine How Much You Can Afford To Pay Off
As soon as you have determined the type of settlement you are seeking, determine how much money you can afford to pay in a lump-sum payment or monthly installments.
It is important that you carefully review your finances and create a budget. It is possible to face larger issues such as a debt lawsuit if you fail to fulfill your settlement agreement due to financial difficulties.
3. Make An Offer To The Debt Collectors

It is recommended that you begin with at least 60% of the loan value. In any case, do not be surprised if your creditor requests a larger payment.
Do not allow your student loan to go into default. As soon as it does, send your student loan provider (or debt collector) a settlement offer stating something like:
“I currently owe [$___] for [account number]. I don’t have that kind of money to pay off the loan currently. But I do have [$___] that I can pay within 30 days to settle the debt in full. If you accept, please respond to this message with a settlement agreement. If you would like to counter, please reply with your counteroffer amount.”
4. An Agreement Should Be Negotiated
You should wait to see how your student loan provider responds. They will likely respond with a counteroffer. Negotiations may take several rounds before an agreement is reached.
Most importantly, do not accept an offer that you cannot afford. The situation will only worsen as a result.
5. Make Sure The Debt Settlement Agreement Is In Writing
Make sure you obtain a written agreement from your student loan provider before transferring funds to settle your loan.
You must fulfill your end of the agreement completely. You may be subject to legal action if you do not comply with the requirements of your student loan provider.
The settlement agreement will usually be drafted by the loan service provider or the debt collector, so make sure to review it carefully before signing.
Is There An Alternative To Paying Off My Student Loans?
In case you are interested in alleviating your student loans, you have a few options to consider.
The first alternative available to many student loan borrowers is an income-driven repayment plan. Your annual earnings and the size of your family determine payments under an income-driven repayment plan. Often, an income-driven repayment plan can lower your monthly repayments to an affordable level.
There is also the option of discharging your student loans. There may be instances in which consumers find a discharge as an option, such as if a college they attended closed before they could complete a degree program or if they suffer from a total and permanent disability.
You may be eligible for public service loan forgiveness if you work for a government agency or a nonprofit organization. You must make at least 120 payments before the servicer forgives your loan.
Finally, you may wish to consider refinancing your loan. A refinance can reduce your interest rate, allowing you to dedicate more of your monthly payment to the principal of your loan rather than interest and fees. If you refinance your loan with a provider outside the government, you may lose certain benefits, such as consideration for an income-driven repayment plan.