Can You Settle Private Student Loans for Less Than You Owe?
Updated: Sep 11
Sometimes.
Private student-loan lenders and debt owners may be willing to negotiate repayment arrangements or accept a settlement for less than the total amount claimed.
But borrowers should understand something important:
Settlement is not a guaranteed program.
There is no federal private-loan settlement formula that requires a lender to accept a particular percentage.
Why Would a Lender Settle?
A lender or debt owner may decide that accepting an agreed amount is preferable to continuing collection efforts.
The willingness to settle can depend on factors such as:
- whether the account is current or in default;
- the borrower's finances;
- likelihood of successful collection;
- whether there is a cosigner;
- age of the debt;
- applicable statute of limitations;
- whether litigation has begun;
- ownership of the account; and
- the amount available for a lump-sum payment.
Should You Intentionally Default to Get a Settlement?
That can be dangerous.
A borrower should not assume that intentionally stopping payments will automatically produce a favorable settlement.
Default can lead to:
- serious credit damage;
- collection calls and letters;
- additional interest or charges;
- cosigner collection;
- referral to a collection agency; and
- a lawsuit.
Settlement may become possible in some defaulted private-loan situations, but the borrower should understand the risks before deliberately stopping payment.
Settlement Versus Repayment Modification
Settlement is only one possibility.
A borrower who is still current may first want to determine whether the lender offers:
- temporary hardship relief;
- reduced payments;
- interest-only payments;
- extended repayment;
- modified interest terms; or
- another negotiated arrangement.
Get Settlement Terms in Writing
Do not rely solely on a telephone conversation.
Before sending settlement money, the borrower should understand in writing:
- the amount being accepted;
- the payment deadline;
- whether the payment satisfies the entire obligation;
- what happens to any remaining balance;
- whether the cosigner is also released;
- how the account will be reported to the credit bureaus; and
- who legally owns the account.
Possible Tax Consequences
Cancellation of debt can sometimes have tax consequences.
The tax treatment depends on federal and state law and the borrower’s individual circumstances.
A borrower considering a significant settlement may want to speak with a qualified tax professional before finalizing the agreement.
The Bottom Line
Yes, private student-loan settlement can be possible.
But the better question is not simply:
“What percentage will they take?”
It is:
“What is my legal and financial position before I negotiate?”
For a broader overview of your options, see Private Student Loans: Your Legal Options When Payments Become a Problem.
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Need Help Evaluating a Private Student Loan Settlement?
Settlement should be evaluated together with the loan documents, payment history, financial circumstances, cosigner liability, statute-of-limitations issues, bankruptcy questions, and litigation risk.
This article provides general educational information and is not legal advice. Laws and individual circumstances vary. Reading this article does not create an attorney-client relationship.
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