Life happens and sometimes, poor financial choices or a financial hardship can cause you to be in default on your student loan. Unfortunately, there is almost no way to get out of paying your student loan debt. There are, however, a few options to settle your loan for less than you owe or in the case of a federal loan, to defer your payments until you are in a better financial situation.
What you need to know about a student loan settlement
A settlement of your student loan is an agreement made between you and your lender in which the lender accepts less than what is currently owed on your loan. This isn’t a loan discharge. You will still owe the agreed upon amount.
When you first miss a student loan payment, you typically have a little time before you’re in default. Once you’ve missed approximately three months worth of payments, many banks officially considered you in default. It can sometimes be months before you’re contacted by a collections agency, however. Once you enter into collections, the collection company will try to call, and send you letters attempting to collect your debt.
The bank wants you to pay the full amount. If there’s any chance they think you can resume payments and repay the debt in full, this is their ideal option. Once it’s determined that you’re financially unable to do so, the collection agency will work with you to either set up a payment plan or settle on an amount that you can pay in full to close the debt.
It isn’t an easy out
Although settling the debt for less than you owe may seem like an easy out, there are a few things to remember. First, even the settlement is going to be a large sum, so you need the funds to pay this. This situation also usually only applies to private student loans.
Federal loans may be a lot harder to settle because the government is able to garnish your wages, withhold tax refunds or charge you taxes on the difference you settle for.
What happens to your credit
You also want to keep in mind that the failure to pay your debt has been recorded on your credit history. Your missed payments and the settlement will stay on your credit for the next seven years.
If you’re having trouble making payments, contact your loan provider as soon as possible. They can usually work with you before you enter into default on a temporary solution.