Does settling student loan debt hurt your credit?
Plus, you’ll lose eligibility for student loan forgiveness programs, income-driven repayment plans, and new federal student aid. Finally, your name will be listed in CAIVRS and you won’t be able to borrow a mortgage from the federal government. So before you strategically default on federal student loans, make sure you know the consequences.
- negative credit reporting
- wage garnishment, bank account levy, and a lien placed on your home, but only if a student loan lawsuit is filed against you and the lender get’s a court judgment against you.
Settling student loan debt may hurt your credit and FICO score. Lenders understand that settlements happen after delinquency and default, and the settlement will be on your credit history for years to come.
The student loan balance will be zero on your credit report, but the status will show you settled the account for less than the full amount.
However, other options like a judgment or collection can have an even greater impact on your credit. And a student loan can’t be settled until you’re already in default, which is far more of a drag on your credit score.
This is one reason it’s essential to consider all of the factors in your individual case – and ask an expert.
How much money will I save by settling my student loan?
Savings for private student loan settlements vary greatly depending on the lender. Some lenders will accept 40% of the current principal and interest. Other lenders will demand 75%.
Federal Student Loan Settlement Guidelines
- Standard Compromise – has three different varieties: (1) 100% of collection fees waived; (2) 50% of interest owed waived; or (3) 10% of principal balance and unpaid interest waived.
- Discretionary Compromise – you present an offer for less than the Standard Compromise amount with a letter detailing why the offer should be accepted (cancer, old age, financial hardship, etc.).
- Non-Standard Compromise – the debt collector offers you a settlement for less than the Standard Compromise amount without approval from the U.S. Department of Education.
Borrowers in default with loans made under the Federal Family Education Loan Program (FFEL Loans) that are owned by a guarantor, may agree to a waiver of 30% of your principal and interest.
However, in my experience, federal student loans almost never settle for less than 85% of the outstanding principal and interest balance.
Who can help you negotiate student loans?
- Negotiate yourself. There’s no law against you going the DIY route and contacting the debt collection agency that has your student debt to offer a settlement. However, be careful about resetting the clock on old private student loan debt by agreeing you owe the loans and setting up payment. Federal student loans never go away, so you don’t have to worry about restarting the statute of limitations.
- Hire a lawyer. A student loan lawyer or an attorney who specializes in debt settlements can negotiate a settlement for your federal or private student loans. Hiring an attorney doesn’t guarantee you a result or that you’ll save you more money than if you tried to settle yourself. That said, a lawyer experienced in negotiating settlements with certain lenders, like Navient or SoFi, has a better understanding than you do of what’s the best settlement offer.
- Work with a debt settlement company.Debt settlement companies help by having you stop making payments to your lender and then make payments to the company. During that time, late payments will be added to your credit report causing your credit score to drop. Once you’ve put enough money aside, the company will try to negotiate a settlement. But they may not be able to do so because some lenders refuse to work with debt settlement companies. Before you hire a company, ask if they’ve ever settled with the lender that https://americashpaydayloan.com/pawn-shops-id/ owns your loans and, if so, how often.
