How to settle student loans?

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Question:

I’m being overwhelmed by my student loans? How can I settle them for less than what I owe?

Answer:

Debt settlement—or paying off a loan by paying less than the full amount owed—is voluntary on the part of lenders. No lender is forced to allow you settle a debt for less than the amount you agreed to pay when you took out the loan.

You try to settle your student debt the same way you would try to settle any debt: by contacting the lender, explaining (and being able to demonstrate or prove) your hardship and financial circumstances, and negotiating some partial payment of the debt as payment in full. While lenders don’t have to settle with you, they tend to be reasonable: if it looks like what you’re offering is both a decent deal (e.g. you’re paying all or most of the principal, even if you’re not paying the interest) and the best they can hope for, they are more likely to take it. Being able to offer more money up front, such as by taking out a home equity loan to provide a lump sum payment, will increase the attractiveness of your settlement offer.

However, that said, it can be more difficult to settle a student loan than many other kinds of debt. That’s because the borrower has less leverage than in most other cases. Often, the borrower can threaten to declare bankruptcy if some settlement cannot be reached, which provides an incentive to the lender to work with him or her. However, it is almost impossible to discharge student debts in bankruptcy, which eliminates that threat. Lenders know that the borrower, except in very special cases, cannot eliminate his or her student debt.

Therefore, in student loan cases, it’s often a good idea to look into various “deferment” options available to you. There are typically some mechanisms by which you can delay paying student loans, at least while in financial distress. This is often a much more available and practical solution than looking to settle a debt when you lack the leverage of bankruptcy.

If you are determined to try to settle your student loan debt, you should retain an experienced attorney to negotiate on your behalf. Negotiating with creditors is an art; you don’t want to have to try to master it when the stakes—your own debt, which is “overwhelming” you—are so high.

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