Debt Settlement of Student Loans

Debtors who have private non-student debts can often settle their debts for several reasons. A big reason is the possibility of discharging the debt entirely in bankruptcy. A second reason is that a creditor may be willing to take guaranteed money instead of money that is speculative. A third reason is that a settlement can save the cost of legal fees.

Student debt, unfortunately, is not as easy to settle – mainly because student debt can no longer be discharged in bankruptcy.

The benefits of debt settlement

There are many reasons debtors want to settle their loans if possible. It means:

• They don’t have to worry about wage garnishments
• They don’t have to deal with credit agencies
• They don’t have to worry about having their assets seized
• They can restore their credit faster if they got behind on their loans

While debt settlements for a few cents on the dollar are not realistic, settlements for half, 2/3, or some higher amount may be possible because creditors get the money now instead of having to wait. Creditors save administration and collection fees. For many creditors, ready money is better than waiting years to collect it – even if the interest rates are charged. Creditors know full well that many student loans go into default. Department of Education statistic figures show that the three-year default rate is around 14% – as of 2010.

If the debtor has federal loans that may have a loan forgiveness possibility, then the debtor and an experienced student loan attorney may be able to argue that it is better for the creditor to take the money now than suffer a loan forgiveness, student or teacher, years down the line.

The problems with debt settlements

Federal student loan collectors have many tools to collect student loan debts – some better than private loan collectors. These advantages include:

• Garnishing wages
• Taking Social Security benefits
• Taking other government benefits
• Taking tax refunds

Key factors in obtaining a debt settlement

The loan creditor will consider a number of factors before agreeing to a debt settlement. The key factors are:

• Figure the full amount of the loan including interest
• Figure the administration costs to collect the loan
• Figure the likelihood of loan forgiveness
• Calculate the ability to seize assets. Borrowers who are self-employed have an advantage because their income cannot be garnished.
• Workers who habitually switch jobs or are unemployed may never be able to pay off their loans

Typical settlements include

• Waiving the collection fees. These can average about 20% of the loan
• Reducing the overall amount by a small percentage such as 5 or 10 %
• Reducing the amount of interest owed by up to 50%

Debtors should always speak to an attorney first because simple things, like making just one payment, can extend the statute of limitations on collection. Debtors should also be aware that the amount of the debt forgiveness may be considered taxable income.

Some federal debts can be approved directly the debt creditor if enough money is being paid. Other debts need to be approved by the Department of Education.

Still have questions?

If you live in New London County and want help with your student loan debt, call our office now at 860-449-1510 – we’d love to help you!