Home Financial Education Student Loan Debt Settlement: What You Need to Know

Student Loan Debt Settlement: What You Need to Know

Published June 2021 by Jordan Semprevivo
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When you have credit card debt as well as other financial commitments related to your home, car, and insurance, paying off your student debt may seem like a last priority or even a hardship. However, unpaid student debt can have serious negative consequences on your financial future and impact your credit score and overall credibility.

Key Points:

  • Reaching a student loan debt settlement is not as easy as settling consumer debt like credit card debt.
  • You will probably only be able to settle a student loan if it is in default.
  • It pays to hire a specialist in student loan settlements to negotiate loan debt relief.

Some frequently asked questions on the topic are “What can you do about student debt?”, “Can you settle it?”, “What factors do student loan lenders consider when evaluating settlement offers?” The answer is “it depends.” You can, however, forget about treating most student debt settlement the same way you handle consumer debt settlement.


You can only settle a student loan if it’s in default or near it.

Almost no creditors will settle a student loan that is not in default or near it. Even if your reasons for requesting settlement are legitimate, your creditors are under no obligation to negotiate a settlement with you.

When Can You Settle a Student Loan?

You can only expect to strike a deal with your loan holder if:

  • Your loan is in default or about to be in default.
  • You have the money to pay off the settlement in a lump sum.
  • Settlement is a last-resort solution short of court judgment or bankruptcy.
  • Your loan holder can expect to recover more money by settling than by pursuing full repayment.
From the perspective of debt settlement, there is a marked difference between federal student loans and private student loans. The former go into default 270 days after delinquency occurs. Private student loans can go into default after 120 days of delinquency.

Settlement of Federal Student Loans

Federal student debt settlement is rare. The debt holders involved with such loans have their hands tied by the federal government. They cannot afford to be creative when attempting to recover funds. Additionally, they can garnish wages and tax refunds to recover a debt.

In some extreme cases, you may be able to settle your federal student loan.

  • If your loan holder finds that it can’t recover money from you through wage garnishment or other such means, it may be willing to settle and accept a repayment plan. Some people do not earn wages and don’t pay taxes, so the government can’t recover any money from them - hence debt collection is not possible.
  • If you defaulted on your loan before, used rehabilitation to clear your credit history, and defaulted on it again, your loan holder may view that it has run out of other options and give debt settlement a chance.
  • If you can make a solid case that you can’t afford to repay your debt, you may be able to get debt relief via settlement. You need to submit pay stubs, tax returns, and bills to build a credible case that can lead to student loan forgiveness.

Settlement of Private Student Loans

Private student loan providers have more freedom in deciding how to recover the money they have loaned out. Consequently, they may be more willing to settle or review the terms of settlement.

If you can prove to your lender that it won’t be able to recover more money from you in the future, there’s a decent chance that it might want to settle. If you can make a lump-sum payment, your chances of reaching a loan debt relief settlement might increase significantly.

Bear in mind that while private lenders may wish to settle, nothing guarantees that they will. It is entirely up to them whether they grant you this form of debt relief. Some private student loan holders may even try to sue you to obtain the right to garnish your wages.

How to Negotiate a Student Debt Settlement

To negotiate a student debt settlement, you basically have three routes to consider:

The DIY approach

Reach out to your creditors and let them know your intent to settle your loan debt and that you are open to following a loan debt settlement plan.

You can initiate this process by contacting your student loan borrowers directly and communicating clearly that you're actively trying to settle your obligation. Additionally, request any settlement offer in writing to ensure clarity and transparency throughout the negotiation process and allow them to make an offer.

Lawyer up

Hire a specialized student loan lawyer to handle the negotiation for you is another alternative option.

Their expertise can be valuable during negotiations with a lender or loan servicer. However, while they ensure your rights are protected by the law throughout the process, you should carefully consider the overall cost against the potential benefits. Hiring a lawyer for advice with your debt settlement might involve significant expenses with uncertain outcomes.

Moreover, legal proceedings can be lengthy and time-consuming. While a lawyer may be able to negotiate on your behalf, the process can drag on, delaying potential resolution and prolonging financial stress.

Professional debt settlement

If you have a private student loan, which is considered unsecured debt, get in touch with a debt settlement company and let it handle the process. Contact a ClearOne Certified Debt Specialist at 866-481-1597 today to learn what your debt relief options are.


Experienced negotiators may get you a better settlement deal.

How Much Can You Save through a Student Loan Settlement?

Unlike consumer debt settlement, a student loan settlement will likely not save you much. Federal student loan holders can give you limited concessions only. As a result, negotiating a student loan with your loan servicer for adjustments to the interest rate or a more favorable payment plan might be a more practical strategy than expecting settlement offers where they typically accept less.

A typical federal student loan settlement may allow these options:

  • Pay the remaining principal and interest without any collection charges: This plan allows borrowers to settle the debt by paying off the full remaining balance, including principal and accrued interest, without additional collection charges.
  • Pay the principal and half of the unpaid interest that has accrued since the loan went into default: Under this option, borrowers will be able to settle the debt by paying the principal amount owed along with half of the unpaid interest accumulated since the loan entered default status.
  • Pay 90% of the current balance of principal and interest.

An Income-driven repayment plan can be a valuable alternative to settlement, providing the borrower with manageable payment choices based on their income.

As far as private loans go, some loan holders may settle for less than 50% of your principal. Again, there are no guarantees in this regard. Also, remember that you will owe income tax on any forgiven debt.

While there can be benefits to settling a loan, borrowers need to consider all factors and potentially consult with a finance professional to navigate the process effectively.

Another Option: Settle Credit Card Debt Instead

If you are having a problem with paying your student loan and credit card debt, you may find that it is easier to negotiate your credit card debt than your student loan. Typically, credit card debt carries a higher interest rate, making it more expensive to maintain.

For most people, credit card debt is the most expensive type of debt to carry. Getting out of credit card debt may give you enough breathing room in your budget to make student loan payments comfortably. This strategy could be particularly beneficial if you're using rewards credit cards or travel credit cards, as it may help you redirect funds towards more critical financial obligations, like your student loans.

At ClearOne, we prioritize empowering individuals to manage their finances effectively while protecting them from predatory student lending practices. Contact a ClearOne Advantage Certified Debt Specialist at 866-481-1597 to learn what your credit card relief options are and get a free savings estimate today.

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Frequently Asked Questions

Can I settle a student loan debt if I've already entered into a repayment plan or rehabilitation program?

While it's generally more common to settle a student loan debt when the loan is in default, some lenders may still entertain settlement offers even if you're enrolled in a repayment plan or rehabilitation program. However, the terms and likelihood of success may vary depending on your lender's policies and your specific circumstances. Discuss your situation directly with your lender and explore potential options for debt resolution. Settling debt could affect your credit report, so consider the implications before making a lump sum payment or negotiating with a potential collection agency.

How is settling a student loan debt connected to small businesses?

Settling a student loan debt can have implications for small business owners in several ways:

Financial Stability: Individuals burdened by significant student loan debt may hesitate to pursue entrepreneurial ventures due to financial constraints. By settling their loans, they can free up resources to potentially invest in or start small businesses, or even establish a savings account as a financial safety net.

Workforce Development: Small businesses thrive with a skilled workforce. When individuals settle their student loans, they may have more flexibility to pursue additional education or training, enhancing their skills and making them valuable assets to small businesses.

Access to Capital: Small businesses often face challenges in accessing capital, particularly if owners have high personal debt. By settling student loans, individuals can improve their creditworthiness, making it easier to access financing for business endeavors or open a business bank account.

What information should I have ready when contacting ClearOne Advantage for assistance with my credit card debt, and debt consolidation needs?

When reaching out to ClearOne Advantage, have details such as your total outstanding debt amount, the names of your creditors, and comprehensive information about your income and expenses. This will let us assess your financial situation accurately and recommend the best debt relief options for your needs, potentially helping you achieve the best credit and financial outcomes and save thousands.


Topics: Financial Education