By Liz Weston
Nov. 4 Settling student loan debt isn't easy,
but it can be possible - if you're in exactly the right
Troubled borrowers who can offer a substantial lump sum may
be able to free themselves from years of wage garnishments, tax
refund seizures and other collections efforts, according to
student loan experts.
The key word is "substantial." Unlike credit card debts,
student loan debts - which average $27,000 per student - can't
be settled for pennies on the dollar.
"You'll never get that," said attorney Adam Minsky of
Boston, who has brokered settlement deals for several clients.
"But you can settle for anywhere between 30 percent and 80
percent...usually somewhere in the middle (of that range)."
Increasing numbers of borrowers are struggling with their
student loan payments, according to the most recent Department
of Education figures. About 600,000 of the 4 million borrowers
who were scheduled to start payments in September 2010
defaulted, which means they failed to make any payments for 270
days or more. That three-year default rate of 14.7 percent was
up from the 2009 default rate of 13.4 percent.
The Department of Education hasn't released figures about
how many troubled borrowers have sought or been granted
settlements. Student loan expert Mark Kantrowitz expects the
numbers aren't high.
"About 10 percent of borrowers who sought my help obtaining
a settlement ultimately were able to get a settlement," said
Kantrowitz, senior vice president and publisher of college
planning resource Edvisors.com. "Keep in mind that I hear from
borrowers in extreme cases."
Even those who can scrounge up a lump sum - by borrowing
from a family member, for example, or through a windfall such as
a lawsuit settlement or an inheritance - aren't guaranteed
success. That's because student loan collectors, in general, and
federal student loan collectors, in particular, have so many
ways to wring payments out of borrowers.
Federal student loan collectors can garnish wages, grab
federal tax refunds and take a portion of government benefits,
including Social Security, all without taking a borrower to
Indeed, the U.S. Department of Education recovers $1.11 to
$1.22 for every dollar it's owed, figures that include
collection charges and accrued interest, Kantrowitz said.
"They have incredibly strong powers to compel repayment,"
Kantrowitz said. A successful offer is "really the settlement
that will provide more money to the federal government than
they're already getting."
Federal student loan collectors will do a net present value
analysis to figure out what lump sum today would generate the
same future stream of payments expected from the borrower. An
offer greater than that sum is typically required for a
settlement to proceed, Kantrowitz said.
Borrowers whose wages aren't easily garnished, such as the
self-employed or the frequently unemployed, may have an
advantage since federal collectors won't expect much of a future
income stream from them.
In general terms, federal student loan settlements usually
take one of three forms, Kantrowitz said. The Department of
Education may agree to waive collection charges, which can be
substantial; it may knock 10 percent off the total owed; or it
may settle for the current principal owed plus half the accrued
In practical terms, borrowers who want a settlement should
find out how much the Department of Education paid to acquire
their defaulted student loans, and open negotiations with an
offer halfway between that number and the total amount they now
owe, Kantrowitz said. The amount the DOE paid, known as the
default claim, is usually the last amount showed owing on the
loans in the National Student Loan Data System database, he
MURKY SETTLEMENT PROCESS
The process for settling private student loans is less
defined since lenders have different policies, Minsky said.
Private lenders also have fewer powers to collect than the
federal government, which sometimes - but not always - leads to
more willingness to settle, he said.
Private lenders have to go to court to get wage garnishments
and can't seize tax refunds or government benefits. Private
student loans also are subject to state statutes of limitation
that limit how long lenders can sue borrowers over unpaid debt.
There are no statutes of limitation on federal student loans.
Borrowers, however, can unknowingly extend the statutes and
invite lawsuits by making a single payment on an old debt or
even acknowledging a debt is theirs, which is why Kantrowitz
recommends hiring a lawyer to pursue a private student loan
Settlement certainly isn't an easy way out. Borrowers often
face a tax bill for any portion of a loan that's forgiven, since
tax authorities consider forgiven debt to be income. Settlements
also have severe negative repercussions for borrowers' credit
That's why Minsky counsels his clients to consider all other
options first, including loan forgiveness, income-sensitive
repayment plans and loan rehabilitation, a federal student loan
program that expunges defaults from borrowers' credit reports
after they make nine on-time monthly payments. Some clients
decide to take those other paths, while others see a settlement
as a way to close out a difficult chapter of their lives.
"Some people psychologically want to be done with it,"
Minsky said. "They say, 'I don't want to deal with this anymore.
I want this gone.'"