Borrowing money to pay for your college education seemed like a good idea at the time. And it was very easy. But now you’re out of school and those student loans are feeling more and more burdensome. You’re not alone, either. According to the Department of Education, more than one in seven people with federal student loans default within three years of when they began repayment.
You definitely would like to get out from under that burden, and you’ve heard of a thing called debt settlement. But can student loans be settled?
The simple answer to this is “maybe” and “no.”
You might be able to settle your student loan debts if they are private loans. In other words, if you borrowed the money from a bank, a credit union, or some online source, you might be able to settle it. However, your lender(s) isn’t going to agree to settle just because you ask nicely. You need to be able to make the case that you’re having a financial hardship. You will need to show your current budget. You should also have a summary of your finances including all of your income, your other debts, and any liquid assets.
A lump sum payment
It’s unlikely you’ll be able to settle that loan unless you can offer a lump sum payment. For example, if you owe $21,000, you could offer a lump sum payment of $10,500 to settle the debt. This is where the “maybe” comes in as maybe you could offer a lump sum payment and maybe you couldn’t. If not, it’s very unlikely you’ll be able to settle that debt.
The “no” is federal student loans as in “no” they can’t be settled. In fact, they can’t even be discharged in bankruptcy.
What you could do is change your method of repayment. The Department of Education now offers four income-based repayment plans. The most lenient of these is REPAYE or Revised Pay As You Earn. It caps your monthly payments at 10% of your discretionary income.
The second income-repayment plan is PAYE or Pay As You Earn. It also generally caps your payments at 10% of your discretionary income but never more than the standard 10-year repayment plan amount.
The third is Income Based Repayment or IBR. It also generally caps monthly payments at 10% of your discretionary income – if you’re a new borrower on or after July 1, 2014.
Finally, you could choose ICR or Income Contingent Repayment. With this plan, your payments would be the lesser of the following – 20% of your discretionary income, or what you would pay on a repayment plan with a fixed payment over the course of 12 years adjusted according to your income.
What this translates into
Here’s an example of what REPAYE can mean. Let’s suppose you owe $30,000 in Direct Unsubsidized loans and have a starting income of $25,000. In this case with REPAYE, your monthly payment would be $60. The term of the loan would be 20 years and you would end up paying a total of $32,358. If you’re a new borrower and choose IBR and PAYE, your monthly payment would also be $60, your term would be 20 years, and you would end up repaying a total of $39,517.
The big don’t
The big don’t is don’t default on your federal student loans. And, unfortunately, it’s easy to do this. In fact, you technically become in default the first day after you miss a payment. However, monthly default doesn’t occur until you’ve failed to make a payment for 270 days.
The consequences can be severe
The reason you don’t want to default on a federal student loan is because the consequences can be severe. For one thing, your entire unpaid balance and any interest will become immediately due and payable. Your loan will be assigned to a collection agency, and you’ll lose your eligibility for any more federal student aid and for forbearance, deferment, and other repayment plans. Your credit rating will be seriously damaged, and you may lose your federal and state income tax refunds. Worst of all, your employer could be required to withhold money from your paychecks and send it to the government.
If you have student loan debts, the best thing you can do is repay them. If they were private loans, you might be able to settle them, but only if you’re prepared to make a fairly hefty lump-sum payment. And while federal student loan debts can’t be settled, repayment options are available that might make it easier for you to pay them off. But make sure you do something or you could go into default, and that is something you definitely don’t want to happen.