Getting the Timing Right When Negotiating Private Student Loan Debt

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I’ve previously mentioned that private student loan debt can be settled in some circumstances, if the lenders are willing to settle. If your private student loans are unaffordable, a settlement could be available after you’ve stopped making payments.

Typically, lenders will not begin negotiating prior to “charge off” (the official term for a private student loan default) which usually occurs at 180 days (6 months) after nonpayment. When it reaches this status, the account is declared as a loss for the lender, which opens the door for settlement. Lenders know that accounts in default may never be paid again, so it increases their odds of accepting a settlement.

Some private student loan lenders who are nonprofit will not settle – such as small to mid sized credit unions. But many of the larger well known private student loan lenders are for-profit lending institutions, which usually means that there is a possibility for settlement.

Not all lenders are equal when it comes to a private student loan settlement, though. Certain lenders will offer up to 24 months of installments on a structured settlement, while others may only go out to 6 months on settlement installments. Some lenders may accept settlement offers below 50% within the first year of delinquency, but for others it may take longer. There are a couple private student loan lenders that are aggressive with litigation, but in most cases the account will go to several other collection agencies first before the lender attempts legal action. If you’re in default on your private loans, the longer you wait to negotiate a settlement (or payment plan if you can’t afford a settlement), then the more likely it is for legal action to occur. Even if the account is transferred to an attorney collection firm in your state, they will usually still want to work out a settlement prior to pursuing judgment. However, if they do decide to file a lawsuit, you will need to hire an attorney or file a response pro se. If you don’t, the lender can get a default judgment against you which is the first step toward wage garnishment or a bank levy. However, even at the point of judgment, settlement can still be available. I can’t get involved in the legal process, but I can negotiate settlements outside of the legal process even after a judgment has been filed. It’s best to try and settle prior to that if possible, however.

While private student loans may yield a better settlement percentage after a significant amount of time has passed since the charge-off, the risk of escalated collection action also increases. The idea is to maximize the settlement percentage reached while minimizing the risk of the lender taking legal action. This is best accomplished by working out a settlement within 6-12 months after the initial charge off – so within the first year and a half that payments have stopped. In many cases, structured settlements can be negotiated with the private loan lender. They would much rather have a lump sum and may pressure you for that instead, but a structured settlement can provide a much more affordable way to achieve a reduced sum payoff than having to come up with a lump sum. If a structured settlement is negotiated early on, it will prevent any further collection activity as long as all of the installment payments are made over time. A typical structured settlement would be about 1/5th of the settlement amount as a down payment, with the remainder split up over a 6-24 month term depending on what the lender’s guidelines allow. In some cases, structured terms can even be negotiated to 36 months or even longer. The risk of a long term structured settlement is that missed payments can void the settlement with certain lenders, so it’s good to have a few payments saved as a reserve. Other lenders will honor the settlement as long as all payments are caught up by the final date of the structured settlement term.

Structured private student loan settlements make settlement more achievable, lock in the settlement amount (no interest or lates fees accrue over the structured term), and prevent further collection activity. Whether by using a lump sum settlement or structured settlement, taking action within the first 6-18 months (the sooner the better) after stopping payments will often result in a good settlement without the risk of things going haywire. This is a less risky method than the traditional “old school” settlement model, where debt settlement firms would save up client funds for years before making an offer (although they would take fees out of each client’s payment toward their settlement account). By the time the firms had enough saved up in the client’s account to make an offer, they were often facing creditor lawsuits. This is also another reason why it’s important to choose a no-upfront fee negotiator who is incentivized to deliver a great settlement within months after charge off, not years.

You can find an example of a student loan settlement letter sample I’ve received here.

For a free evaluation, send me a message here.

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About Andrew Weber, NACCC Certified Student Loan Counselor

Andrew Weber is a NACCC Certified Credit Counselor and a NACCC Certified Student Loan Counselor. He is the only certified student loan Counselor who specializes exclusively on private student loan issues in the US. He's helped hundreds of borrowers drastically reduce their debts.