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Can You Arrange a Settlement With Student Loan Lenders?

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In a Nutshell

If your student loan is in default and you want to clear up your debt, you might be able to enter into a student loan settlement agreement. When you settle a debt, you negotiate with the lender to pay less than you owe in one lump sum. To negotiate a settlement agreement, your account must be in default. There are advantages and disadvantages to using this debt relief option. For example, you may end up paying less than the total amount you owe on your loan, but you must have a large lump sum available to complete your settlement. The settlement rules are different for federal student loans and private lender loans, so you’ll first need to determine what type(s) of student loan you have before weighing your options.

Written by the Upsolve TeamLegally reviewed by Attorney Andrea Wimmer
Updated April 20, 2023

When Can You Enter Into a Student Loan Settlement Agreement?

The first thing to know about settling your student loan balance is that this process only works if you’re in default on the loan. If you’re making your payments every month, you won’t be able to settle the debt on your student loan for less than what you owe. If you’re only delinquent on your payments (meaning that you’ve only missed a couple of payments and your account is not yet in default status), you’re not going to be able to settle your student loan at this time. 

At What Point Are You Considered “In Default”? 

Delinquency comes before default. For most federal student loans, your account is considered delinquent after 90 days (three months) of missed payments. This delinquency is reported to credit bureaus. Usually, about six months after that, your loan will enter the default stage. 

You must be in the official default stage to settle your student debt for less than the amount owed. You can call your lenders to see if you have any defaulted loans or call the Federal Student Aid Information Center at 1-800-433-3243. If you have a Perkins Loan, contact your school or ECSI

Overall, it takes nine months of missed payments for a federal student loan to default. For instance, if you have a federal student loan servicer such as Navient or Great Lakes Educational Loan Services, Inc., you’ll be given 270 days of missed payments before your loan will go into default. 

When a loan goes into the default stage, a collection agency gets involved. The collection agency may employ a debt collector for debt collection purposes. Collection charges and collection fees will be added to your student loan balance at this time.

What To Do Once You’re Officially “In Default”

Once your loan has defaulted, you can speak with the collection agency about settling your debt for less than the full amount due. A student loan settlement requires you to have a lump sum settlement amount available to close the loan with the collection agency. 

The basic principle of debt settlement is that you can pay less than the total amount owed to close the account. It’s tempting to think about intentionally defaulting on your student loan so you can pay less overall, but there are several consequences to defaulting on a loan and settling a loan. 

Do your research to determine how the consequences will affect your future personal finance plans before deciding whether to default on purpose so that you can settle your loan. 

Advantages and Disadvantages of Settling Your Student Loan Debt

Settling your student loan debt has certain advantages, but there are a handful of disadvantages to keep in mind as well. Below is an overview of the pros and cons of student loan debt settlement:

Advantages of Settling Your Student Loan Debt

Settling a defaulted student loan can save you thousands of dollars. You’ll need to make a lump sum payment to pay off the debt—so you’ll need thousands of dollars available whenever you’re ready to pursue a settlement. The actual amount you save will depend on the total amount of your student loan debt and whether your loan was public or private. 

Your loan will be closed with a zero-dollar balance, and you won’t need to worry about wage garnishments, tax refund garnishments, or court hearings related to your student loan once your account has been closed. If you settle your student debt, you also won’t have to worry as much about retirement. The government can garnish your Social Security benefits to collect on a defaulted public loan, and the debt doesn’t fall under traditional statutes of limitations for credit card debt and other types of unsecured debt

When you settle your student debt, it will be comforting to know that the loan is settled and the account closed, but there are disadvantages to settling your student loan for less than the total amount owed. Give serious consideration to these drawbacks if you’re thinking about settling your debt. 

Disadvantages of Settling Your Student Loan Debt

To settle your student loan debts, your loan must be in default. This puts you in a risky situation if you have a federal loan. Although you have some options when your student loan is in default, you’ll lose the opportunity to use many of the repayment plan options that the U.S. Department of Education makes available to borrowers in good standing. 

Be sure to review the Federal Student Aid website to see if you qualify for alternate payment options before you default on your student loan. Federal loan servicers such as Navient and Great Lakes Educational Loan Services, Inc. will offer these same payment plans. Opting into a government payment plan will likely be better for your budget, credit history, credit report, and credit score than a student loan settlement after default would be.

Does Settling Your Student Loan Debt Affect Your Credit Score?

The short answer is yes. Settling your student debt will hurt your credit and lower your credit score. Although the debt balance will read as $0.00, the debt settlement will show on your credit report and your late payments will remain recorded in your payment history.

Read more here: How Does Debt Settlement Affect Your Credit Score?

Do You Need to Have the Whole Payment Ready To Settle Your Student Debit?

Yes — to make a lump sum payment, you’ll need to have a large sum of money immediately available. This is the biggest challenge for most people considering a student loan debt settlement option. If you have a private loan, the collection agency may work with you or a debt settlement company to discuss a settlement offer and arrange monthly payments, but you’ll only have between one and three years to complete the settlement agreement. 

The IRS tax consequences of a student debt settlement should also be considered in your personal finance budget comparisons. The amount of the loan you don’t pay is considered “forgiven” and will be considered taxable income on your tax return. 

Read more here: How Debt Settlement Impacts Your Taxes

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Can You Consolidate Multiple Debts Into One Debt?

If you have more than one student loan, debt consolidation can be used for federal student loans and loans from private lenders. With debt consolidation, you’ll group your loans together and receive a new interest rate and a new payment plan under a single account. You won’t have to manage multiple loans, interest rates, and monthly payments. 

Instead, you’ll make one payment each month for this new, single account. The interest rate you’ll be offered will likely be an average of the consolidated loan interest rates. If you have multiple federal student loans, you may even be able to consolidate your loans and make a payment plan based on your income.

The disadvantage of consolidation is that existing unpaid interest gets added to your principal balance, and you’ll end up paying new interest on your old interest. You may also have a longer term to repay your loan. 

Learn more here: Your Guide To Consolidating Federal Student Loans

Can You Refinance Your Student Loan at a Lower Interest Rate? 

Refinancing your student loan(s) is another alternative to student loan settlement. When you refinance a loan, you take out a new loan to pay off the old loan, so it could take more time to pay off your debt. The primary benefit of refinancing your student loan is that you may be approved for a lower interest rate than the one you’re paying now. Alternatively, you may be able to get a fixed interest rate instead of a variable one, which could save you thousands of dollars over time.

Federal student loan refinancing is only available in limited circumstances for certain loans, but you may be able to find a private company to refinance a federal loan. Be aware: If you take this approach, you’ll have the disadvantage of losing all of the repayment, deferment, forgiveness, and forbearance options the federal government offers. So make sure you’ve exhausted all alternatives and can afford to make student loan payments on the new plan. 

Other Student Loan Debt Relief Options:

If you have a federal student loan, there are several debt relief options available to you that aren’t available to borrowers of private student loans. In addition to debt consolidation and refinancing, the government offers income-driven payment plans. 

Income-Driven Payment Plans

If you qualify for an income-driven plan, you can make payments based on your income. The loan will be reviewed every year and will be adjusted according to the changes in your income. If you lose your job before the review period, you can simply call the lender and ask them to reevaluate your monthly payment. 


Forbearance is another option for federal student loan borrowers. When your loan is in forbearance, you don’t have to make payments for a year, but your loan will still be charged interest. You do have the option of making interest-only payments during your forbearance, and that will save you money down the road. 

At the end of the forbearance period when your repayments begin, the interest charged gets added to the principal balance. Then your repayments will start with interest charged on the new balance that includes your old interest. Basically, you’ll be charged interest on interest unless you pay the interest amount proactively. You’ll end up paying more than your original payment plan if you use the forbearance option, but you’ll keep your student loan out of default. 

You can use the forbearance option more than once, but a general forbearance has a three-year cumulative limit. There are exceptions for certain mandatory forbearances that apply to certain professions and military members.

Some private student loan lenders may offer forbearance or income-based payments for student loans, but it will depend on the terms of the loan. You can call your loan servicer and ask them if they have those options available. 


Bankruptcy does not result in discharge of most student loans, but there are a few exceptions to this general rule. The bankruptcy court will review whether your financial hardship is permanent and/or is likely to last for the term of the loan. It will also look at your income in relation to poverty level standards and outlooks. 

The other options mentioned in this article are more likely to be realistic solutions for students trying to resolve their student debt. If you think you might qualify for a hardship, you can talk to a bankruptcy attorney to see if filing for bankruptcy relief is the best option for you.

Learn more here: What You Need To Know About Discharging Student Loans in Bankruptcy

Let’s Summarize...

To settle your student loan debt (which you can only do after your account has entered default status), you must pay a large lump sum. That is a difficult task for most student borrowers, especially for those facing financial hardships. Income-based repayment plans, consolidation, refinancing, and forbearance are more realistic debt relief options for most students. 

Call your student loan lender to see what options you have available for debt relief. You don’t have to decide on the phone right away, you can take time to review your financial situation and make the best choice for your long-term financial comfort.

Written By:

The Upsolve Team

Upsolve is fortunate to have a remarkable team of bankruptcy attorneys, as well as finance and consumer rights professionals, as contributing writers to help us keep our content up to date, informative, and helpful to everyone.

Attorney Andrea Wimmer


Andrea practiced exclusively as a bankruptcy attorney in consumer Chapter 7 and Chapter 13 cases for more than 10 years before joining Upsolve, first as a contributing writer and editor and ultimately joining the team as Managing Editor. While in private practice, Andrea handled... read more about Attorney Andrea Wimmer

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