Student Loan Default: How to Settle for Less

According to EducationData.org, student loan defaults affect about 9 million individuals and their families. Of new graduates, 11% default on their student loans within the first year of repayment. For those that have defaulted on their student loans, you may notice a few letters or emails from collection agencies, but if you continue to miss payments, you’ll start receiving phone calls. While collection agencies are allowed to contact you, they cannot harass you. The Federal Trade Commission (FTC) defines debt collection harassment as: • Threatening to harm you. • Using obscene or profane language. • Repeatedly calling in order to annoy or harass you. They cannot call you before 8 a.m. or after 9 p.m., and they also cannot contact you at your place of work. If a collection agency is doing either, you should report them. You are allowed to reach out to the collection agency by mail and ask them to stop contacting you; however, it could result in them taking action against you, like a lawsuit. It may be beneficial to work with the collection agency to settle the debt.

Confirm the Debt with the Agency

If you do speak with the debt collection agency, which is recommended, you should confirm a few things: 1. Debt owed. You should first ask them how much debt is owed. Your numbers may match theirs – or they may not. 2. Name of the creditor. The debt collection agency should tell you who you owe money to. Again, their creditor needs to match the name of yours. 3. How to get the name of the original creditor. If the name they give you doesn’t match the creditor that you believe you owe money to, they need to explain a way to find the original creditor. 4. What to do if it’s not your debt. If you think a mistake has been made and they have the wrong information – or the debt they’re calling about is not yours – they must provide next steps for you to clear your name. If everything the debt collection agency shares with you is legitimate, it’s time to move forward in settling your debt. But, if there are discrepancies, it may be time for you to hire a lawyer. At this stage in the process, you need to be on your guard against debt collection scammers. If the information they give you does not line up with your own, do not share personal or financial information, and contact an attorney immediately. The FTC provides more in-depth information on how to interact with debt collection agencies or scammers.

Filing Bankruptcy to Discharge Student Loans

When it comes to settling your debt, you have a few options. However, there is one route you cannot go, and it’s typically the first option graduates try. Unlike other forms of debt, student loans cannot be discharged through bankruptcy. It is said that only 1% of student borrowers have succeeded in getting their loans discharged through bankruptcy. Only those that can prove they would experience undue hardship if they had to settle the debt can qualify. Undue hardship, according to studentaid.gov, is characterized as: • Unable to maintain a minimal standard of living. • Hardship would last for a significant amount of the repayment period. • Made good faith efforts to repay the student loans before filing bankruptcy. On the very slim chance that you’re able to discharge your student loans through bankruptcy, it will ruin your credit for seven years. It’s advisable, then, to work on settling your debt rather than attempting to file for bankruptcy.

Settling Student Loan Debt

There are a few options for borrowers who are hoping to settle student loan debt. However, in each scenario, a lump sum payment will be required to pay off most of the balance. A lump sum could be acquired through a bonus from work, an inheritance, or borrowing from a family member. Typically, you will have to pay the settlement within 90 days. The U.S. Department of Education allows collection agencies to make three kinds of settlement deals without their approval: 1. Waiver of collection charges. Borrower only plays the current principal and accrued – but unpaid – interest. 2. Payment of current principal balance. Borrower will also pay half of accrued – but unpaid – interest. 3. Make a 90% payment. Borrower pays at least 90% of current principal and interest balance. You can make an offer that is different than the above, but the collection agency will have to get approval from the Department of Education. If you do receive a settlement, be sure to get the offer in writing and have it reviewed by an attorney. You don’t want any surprises. For instance, some borrowers have had their student loan debt resurface years later and were not able to prove that it was paid in full. For this reason, get a “paid in full” statement after you have paid your settlement. See Student Loan Debt Settlements on FinAid for additional information.

Student Loan Repayment Plans

If making a lump sum is impossible, there are ways to work out an affordable repayment plan. For example, federal student loans offer income-based repayment as an option. For most borrowers this will result in a monthly payment that is less than 10% of gross monthly income. The monthly payment is zero for borrowers who earn less than 150% of the poverty line. Before you can switch to an income-based repayment plan, you may have to rehabilitate your student loans. By making nine out of ten consecutive, on-time, full voluntary monthly payments, which are typically about 1% of the current principal and interest, you will be able to clear the default. If you’ve defaulted on your student loans, don’t despair. There are options for you to either pay off the debt or bring yourself back into good standing.