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Student loans are something that most people have to deal with. There’s never been more student debt in America than today. In fact, it’s reached a point where there is more student loan debt than auto loan debt and credit card debt combined.

Therefore, it should come as no surprise that lots of people around the country are having problems with student loan debt. More than 1 in 7 student loan debt holders are in default as you read this. If you’re having problems with student loan debt, you’re not alone. There are a number of options for people who are in trouble with their student loans, including different programs and laws that protect borrowers. However, for some people these options aren’t enough. Some student loan borrowers may want to consider debt settlement as an option for their student loans.

What is Debt Settlement?

Debt settlement is a process consumers can undertake where they negotiate with their creditors or debt holders and get them to agree to accept a lower amount of money in exchange for eliminating the debt. The borrower gets to pay less overall, and the lender gets a large portion of the total owed up front and doesn’t have to deal with the expenses of servicing that loan anymore, and also doesn’t lose money from missed payments. There are situations where this can be a win-win, but there’s some important things you should know before you try and settle your student debts.

Debt Settlement Pre-requisites

In order to achieve a debt settlement for anything, student loans included, there are a few things that you must have to make the process successful. It’s important to keep in mind that any lender would prefer to get the whole amount of the loan repaid, and so they’ll only entertain settlement options as a last resort. A successful settlement process requires you to have the amount of the settlement up front and ready to transfer to a borrower. For example, if you settle $20,000 in debt for $15,000, you need to have $15,000 available in liquid assets for the process to work. That’s a tall order for many people, as few people who are having problems meeting their payments will have that much cash on hand. Moreover, you should have a budget that documents all of your income and expenses, an explanation of your financial hardships, and a reason why the money you will pay is only available to a settlement process.

Student Loan Debt Settlements

When it comes to student loans, there are some common scenarios for settlement. Collection agencies are authorized to accept three different kinds of settlements without needing approval from the federal government. The first option is principal plus half of the unpaid interest. Another settlement scenario is the unpaid principal plus the accrued interest. Finally, collection agencies are allowed to authorize a settlement for 90% of the current loan and interest balance. These are by far the most common formats of debt settlement for student loans, but they aren’t the only options. However other formats of settlement take longer because they have to be approved by the federal government.

Additionally, student borrowers have to demonstrate that the money for the settlement is only available in the context of a settlement. For example, if a borrower received an inheritance, a lender won’t accept a settlement because they are allowed to collect from that inheritance. But if a relative offers to pay off student loans with money that the borrower doesn’t have access to, then a settlement is possible.

Things Not to Do

There are a few strategies that you should avoid when trying to get a settlement for your student loans. The first thing you should do is avoid taking about the loan like other products. For example, your lender won’t listen to you if you say that you want a settlement because you’re unhappy with the quality of the education you received. Instead you should talk about why you’re having a hard time meeting your bills. You should also avoid offering money in protected retirement accounts, because those can’t be touched by collections. Finally, you should ask for a paid in full statement to avoid zombie loans coming back to haunt.