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The Truth About Settling Federal Student Loans

You may be able to settle your federal student loans – but don’t expect much.

You probably know that there are only two guarantees in life – death and taxes.

And you’ve also been told that when it comes to federal student loan debt, you’re on the hook for the full balance.

I can’t comment on the first (I pay my taxes but, to date, have not died) but I can tell you that settling the student loan beast isn’t a pipe dream.

Depending on your situation, it may or may not work out for you.

Federal Student Loan Settlement Guidelines

If you’re in default on your federal loans, the U.S. Department of Education explicitly allows debt collectors to settle your debt. If you’re current, that’s not going to happen.

Compromises are account settlements that involve a reduced overall payment to satisfy the federal student loan debt in full. Compromises are not to be offered as the first option in collection negotiations, and debt collectors are instructed to discuss it as an option after exhausting other negotiation opportunities.

Types Of Federal Student Loan Settlements

The U.S. Department of Education allows three types of settlement options:

  • Standard compromises, which are as follows:
    • You pay only the current principal and interest (waiver of projected collection costs/fees);
    • You pay at least the current principal and half the interest (50%); or,
    • You pay at least 90% of the current principal and interest balance.
  • Discretionary compromises, which involve a payment of less than the standard compromise amount. All discretionary compromises require prior approval by U.S. Department of Education, so the collection agency can’t agree without some back-up documentation; and
  • Nonstandard compromises, which are offered to only a very limited number of student loan borrower without approval by the U.S. Department of Education.

How A Federal Student Loan Settlement Gets Paid

If your settlement is approved, you’ll have to pay it by certified funds (cashier’s check, money order, certified personal check) or by credit card. The collection agency will not accept personal checks.

In addition, all settlement offers are valid for 90-days from the date of the date of approval.  If you’re going to be making payment after the 90-day deadline, the collection agency will need to get approval from the U.S. Department of Education.

After Settlement, The Tax Man Cometh

When you settle a debt, you will get a Form 1099 in the mail. You may need to pay taxes on the forgiven amount of the loan, so be careful to factor that into your calculations before settling.

Get A Student Loan Lawyer Involved Or DIY?

I’ve had clients come to me after they tried to settle their federal student loan debts on their own, only to fail miserably. Some people have done themselves in by their words or actions, others can still be helped.

It all depends on you, your ability to negotiate on your own behalf, and the attitude of the debt collector.

But as far as I’m concerned, the risk of an unsuccessful negotiation is far larger than the cost of getting me involved.  If you’re talking about $20,000 in federal student loan debt, settling it is going to make a huge difference in your life – why risk it?

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By |June 12th, 2013|

About the Author:

I've been a consumer protection lawyer since 1995, working to help people end their bill problems. I'm a faculty member at the Student Loan Law Workshop, a nationally recognized speaker, and a long-time member of both the National Association of Consumer Bankruptcy Attorneys and National Association of Consumer Advocates.
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