Settling student loan debt
Student loan debt may be more difficult to negotiate than other debts since this type of debt is harder cancel (discharge) in bankruptcy. If you do decide to negotiate, here are some important things to know if your debt is from a student loan.
Your debt may have been bought by a debt collection company
The loans may be held by the financial institution that originally issued the loan, or may have been sold to another company. These types of companies often buy the debts for a much smaller amount than what you actually owe. Their goal is to collect more than they paid for the debt and cover their costs to collect the money.
They may accept a deal if you offer a reasonable amount over what they paid for the debt, that covers their costs, and provides a reasonable profit.
Creditors get a tax savings on uncollected debt
The creditor you originally owe money to can get tax savings of about a third of the amount of any uncollected debt. So they are likely to consider an offer from you that's more than they would receive in tax savings, especially if the amount they receive from you, plus the tax savings on the remaining amount approaches or exceeds what they have paid out.
Options for settling your debt
You may be able to settle if you offer to pay a portion of the amount as a single payment
If the creditor has not yet filed a lawsuit against you, you may be able to settle by offering a single (or lump-sum) payment of a portion of what you owe. The creditor sometimes has an incentive to take this lesser amount because it removes the risk of spending time, energy, and money trying to collect later on.
The amount that a student loan company will accept as a single lump-sum payment to settle the debt often ranges anywhere from 50% to 90%, depending on the company and how difficult it would be to collect from you.
If a creditor does accept a smaller amount, you may have to report this on your taxes
You may have to pay taxes on the amount of debt that is forgiven in a negotiation. If the other side accepts an offer of more than $600 below the amount owed, the creditor will send you and the IRS a tax form identifying the amount forgiven as taxable income. Depending on your financial situation, you may have to pay income tax on this amount.
Federal loans
Federal loans are are often collected directly by the federal government, not through the court. Nonetheless, private loans can often result in a lawsuit.