Federal Student Loan Debt
Settling Your Loan
For federal student loans, there are few settlement opportunities. If you’re in default, the U.S. Department of Education explicitly allows debt collectors to settle your debt. But those settlements happen only if you're in default, and if the debt collector has no realistic chance of ever being able to collect any money from you.
In other words, you've got to have been in default for a long time. The Department of Education must have been unsuccessful in doing an administrative wage garnishment because you don't have a job, and tax refund offsets must have come up empty.
That's why federal student loan settlements aren't offered as the first option in collection negotiations, and debt collectors are instructed to discuss settlement as an option only after exhausting other negotiation opportunities.
When they are offered, the Department of Education allows three types of settlement options:
- • Standard compromises, which involves either payment of the current principal and interest with a waiver of projected collection costs/fees, payment of at least the current principal and 50% of the interest, or payment of at least 90% of the current principal and interest balance.
- • Discretionary compromises, which involve a payment of less than the standard compromise amount, but only with prior approval by the Department of Education. The collection agency can’t agree without backup documentation from you.
- • Nonstandard compromises, which are offered to only a very limited number of student loan borrowers.
If your federal student loan settlement is approved, you’ll have to pay it by certified funds or credit card within 90 days of the date of approval.