Before you start negotiating, check with your student loan servicer to find out if your loans are near or in default. When you make contact, the servicer might offer you a forbearance or alternative repayment plan like interest only payments for a short-period.
Step 1 – Know what you can afford
Check your finances to know how much you cash you can put your hands on and when it will be available to you. Look at your savings, 401k, inheritance, family members, pay stubs, and monthly expenses to learn what you can afford in a lump sum or per month.
Step 2 – Know what type of loans you’re settling
Remember, settlements vary greatly depending on whether you’re settling federal student loans or private student loans. If you’re not sure what type of loans you have, check . Any loan listed on the Federal Student Aid website is a federal student loan. If your loan isn’t listed there, it’s likely a private student loan.
- Direct Loans
- FFEL Loans
- Perkins Loans
Step 3 – Contact the debt collector
Ask the representative for the repayment options on your defaulted loan. If they don’t offer you a settlement, ask if settlement is an option, and, if so, how much will they accept. At this point, the representative may ask you for about your personal finances, marital status, etc. Try to avoid giving too much detail until you get an offer. Once you get an offer, you can either accept it or counter.
If https://americashpaydayloan.com/pawn-shops-co/ you’re unsure how to get a settlement offer, explain a summary of your situation and ask, “Given my situation, what can we do to resolve this debt as quickly as possible?”
Step 4 – Review the offer
- the loan ID numbers are listed
- your name and contact information are correct
- the settlement payment plan terms are listed (lump sum, monthly payment, payment date, etc.)
Step 5 – Pay the settlement
Submit payment by following the payment instructions listed in the settlement offer. Typically, you can make the payment using a check, money order, debit card, or using autograft. Many lenders won’t let you pay using a credit card.
What to expect after settling?
After you make your payment and fulfill the terms of the settlement, you will receive a debt clearance letter. This letter will serve as proof that you are no longer financially responsible for the particular student loan.
Additionally, you’ll receive a Cancellation of Debt notice (a 1099-C) from the IRS at the end of the year. A 1099-C represents the unpaid portion of your student loan as taxable income. You’ll need to file this with your tax returns and will likely need to pay income tax on that amount. However, the IRS does offer a process to avoid having to pay taxes on the canceled amount.
Alternatives to settling student loans
If coming up with at least half of your loan balance isn’t feasible, you still have options to get out of your student loan debt and get back to living your life.
The first option is to enter a repayment plan with your lender. A private lender isn’t required to provide student loan repayment options for borrowers in default, but federal student loans allow repayment plans.
Once the payment plan is complete, the loan is considered current, and the default status will be removed from your credit report.
Another option is to refinance or consolidate your defaulted student loan. These options may allow you to get a lower interest rate and monthly payment. Rehabilitation (available to federal student loan borrowers) can suit some borrowers with defaulted student loans.