It is worth considering a settlement or compromise, especially if you have a fairly large lump sum to offer. It can be difficult, however, to negotiate this type of deal.
Federal student loan settlements are difficult to get, but are possible in some cases. The Department of Education can settle (also known as compromise) FFEL or Perkins Loans of any amount, and suspend or terminate collection of these loans. It can be difficult, however to negotiate a “good” deal. The Department of Education provides only limited guidance on what they are likely to accept. Schools may also write off very small Perkins Loan balances.
Direct Loan Settlements
The Department does not provide much information about compromises and settlements. They have said that there are standard, discretionary and nonstandard compromises.
The Department has stated the following guidelines for compromising Direct Loans. These are all types of standard compromises except for the last category, known as “discretionary compromises.” Collectors must get prior approval from the Department for these compromises.
|Type of Compromise:||Borrower Pays:||Account Eligibility:|
|1.Waiver of Fees||Principal and Interest||All Debts|
|2.50% Interest + Fees||All principal and 50% interest||All debts|
|3.10% P&I||90% P&I||All debts|
The Department also discusses general guidelines for compromises in its 2009 Private Collection Agency manual (see chapter 7). Note: Although the most recent, complete version of the government private collection agency manual is from 2009, NCLC recently obtained through a FOIA request a more recent, redacted version from May 2016. In addition to basic guidelines, the manuals describe minimum compromise amounts.
Guaranty Agency Settlements
The Department has Standardized Compromise and Write-Off Procedures for use by guaranty agencies. These are for negotiated agreements between borrowers and guaranty agencies to accept less than full payment as full liquidation of the entire debt.
To summarize the guidelines:
- Collection costs can be waived.
- 30% of principal and interest can be waived. If a guaranty agency chooses to compromise more than 30%, it cannot waive the Department’s right to collect the rest.
WARNING: These agreements will only stop guaranty agency collection activity, but you will still owe the debt. You can negotiate harder and try to get the Department or guaranty agency to cancel the debt. Also, guaranty agencies are permitted to accept these settlements, but they are not required to do so.
There may be tax consequences if you get a student loan settlement. It is a good idea to consult a tax professional for more information.
If you pursue settlement on your own, make sure to get the final agreement in writing and confirm that the settlement means that the loan is paid in full and that you no longer owe anything.