Can I negotiate my (non-delinquent) student loan down?
February 9, 2012 9:47 PM   Subscribe

So, I've been working for a few months now and got a nice sum saved up - enough to pay back all my student loans in one lump sum payment. Is there somebody I can negotiate with to lower the outstanding debt in exchange for making a lump sum payment? In other words, I'll pay them less than the outstanding balance and they'll take over the loan. I've tried searching for other people in the same situation, but it seems like this idea isn't very popular for some reason. Surely there are banks that would jump at the chance for some cold hard cash right now...
posted by ndr to Work & Money (20 answers total)
Because student loans aren't dischargeable in bankruptcy, the lenders know that they will eventually be able to collect from almost everyone. So there's little incentive for them to negotiate with you and end up with less money. I'm not saying it could never happen, but I've never heard of it, and the status of the loans makes me think that it's an unlikely prospect.
posted by decathecting at 9:52 PM on February 9, 2012

What decathecting said; also the loans are guaranteed by the government, so even if you die, they get paid. Probably won't happen, sorry! Don't let that stop you from doing it, though. Honestly, they're a huge burden. Pay it and be glad it's gone!
posted by clone boulevard at 9:54 PM on February 9, 2012

The interest on the loan is the way that the lender makes money. If the interest rate on your loan is higher than their cost of capital, then they don't want their loan back.

If you just give them back the money that they lent you without continuing to pay the monthly interests, then they cease to make money. And if -- as you propose -- you offer them less than the full dues, they start to lose money. Why would they want to make that deal with you?

So, no, you can't do this. A lender wants to sell cash, not to buy it.
posted by bloggboy at 10:14 PM on February 9, 2012 [4 favorites]

What ndr is asking is if there is someone willing to take his money, perhaps invest it somewhere, and make the payments on his loan for him, eventually paying it off -- not whether the original lender would be willing to take a reduced rate.

A bank won't do this because, in this economy, there is no low-risk investment where they can park your money that will earn them more than the rate on your loan. It is impossible for them to make money in such a scheme.

Someone desperate for cash might do this, in theory, but you shouldn't. If they were a good credit risk, they could get a loan from a bank. So you will be dealing with people who can't get a loan any other way. Say you give this person $10,000 and they agree to make the payments to pay off your student loan, totaling $12,000 over the next four years. Then they disappear off the face of the Earth. You still owe $12,000. Yay. Not a risk I would be willing to take.

Pay your lump sum to Sallie Mae and then pay off the rest of it as quickly as you can. You'll still save a lot of money by paying it off early.
posted by kindall at 10:26 PM on February 9, 2012 [3 favorites]

I paid off my student loan as soon as I was able. It was huge relief in both tangible and intangible ways. I don't recall its impact on my credit rating but that's something to check out as well. Congratulations.
posted by infini at 11:36 PM on February 9, 2012

You'll automatically pay less than the bank expected if you don't pay any interest! Seriously, calculate how much interest you'd end up paying if you made the expected payment every month -- there are plenty of online loan calculators / amortization calculators for this -- and consider yourself way ahead.
posted by amtho at 2:27 AM on February 10, 2012 [2 favorites]

Surely there are banks that would jump at the chance for some cold hard cash right now...

Have you noticed how low interest rates are right now? Money is very, very cheap and easy for banks to get, and at the same time it's difficult for banks (or anyone else) to make much of a return on their investments. Why would a bank surrender a lucrative investment (your student loans) in return for overpriced cash that they can get elsewhere for next to nothing and which they don't have much use for anyhow?

If you were to step through some economic wormhole into a galaxy where interest rates had climbed to ridiculously high levels over the last couple of years, or if you were somehow in a position to stop making payments without repercussion (e.g. unsecured credit card debt or a mortgage on a massively depreciated house in a no-recourse state) then maybe you'd be on to something. But student loans, in this economy? Not a chance.
posted by jon1270 at 3:00 AM on February 10, 2012

As kindall said, this is what is called an arbitrage opportunity. ndr will hand over a lump sum if the arbiter will take over their debt.
My advice - seek to be your own arbitrager - find an investment that pays a better rate than your loans interest, and enjoy the difference.
posted by bystander at 3:00 AM on February 10, 2012 [4 favorites]

And since the question predicates you are in the USA, I would suggest you find an investment property that is suitable for rental (ideally, in a climate which requires little heating in winter and little cooling in summer, where people on a fixed income like social security could easily rent your property) and take this once in a lifetime chance to buy real estate at a massive discount. You are, presumably, pretty young, so you can invest in the long term, and the day to day of property prices don't really matter, but over a decade or two, with rising fuel prices, and raising numbers of retired baby boomers, a place in a temperate area will command a premium.
posted by bystander at 3:07 AM on February 10, 2012 [1 favorite]

so you could do this yourself if you could find an annuity that paid out at a higher rate than your loans (after the tax impact of the interest deductibility). I suspect given the tax kicker you would have to invest the money in something that takes a little bit of risk. You might find a life insurance company that will write you some sort of guaranteed variable annuity where the floor is pretty close to current after-tax cost.

That said - just pay it off. The net gain you are going to make is probably not even going to pay for the time you are going to spend setting the whole thing up. If current rates were much higher than rates when you took the loan out, your plan might make more sense.
posted by JPD at 5:10 AM on February 10, 2012 [1 favorite]

taking money you've saved to pay off a fixed rate obligation and instead using it to buy a variable return asset like real estate is not remotely close to an arbitrage opportunity. If the Real Estate thing appeals to you, and the returns/rental yield make sense relative to the interest rate on your loans, then sure - why not do something like that. Just remember it is not an arbitrage that is essentially free money - you are increasing the riskiness of the assets and liabilities. Not a bad thing at all, especially for someone so young.
posted by JPD at 5:14 AM on February 10, 2012 [1 favorite]

As many have said there is very little if any incentive for the loan servicer to negotiate a lower payoff. However, you will effectively save money (in interest not paid) by paying off early rather than over time. Provided this is the highest interest rate debt you currently have and you have the money in hand, pay it off. Living debt free is a freedom few in this country seem to be able to negotiate, but as one who has accomplished it, it's a pretty bitchin' way to go.
posted by HappyHippo at 6:05 AM on February 10, 2012

I can't imagine who would want to buy your obligation from you, but you can do your own arbitrage if you want. I have enough money saved up to pay off my loans, but thanks to graduating at a period of low rates and taking advantage of the various program incentives available, I currently pay 1.6% interest on my student loans. It would sort of be nice to just get rid of it, but makes much more financial sense to use the money for other investments that will hopefully make more than 1.6% and let inflation eventually reduce the effective interest rate even more.

On the other hand, you do take the risk of your carefully saved-up capital evaporating in the market, so if you really want to be rid of your loans, you should just pay them off.
posted by The Elusive Architeuthis at 6:26 AM on February 10, 2012

What JPD said and what The Elusive Architeuthis* said.

Depends what you're paying in interest (some of which is tax deductible). It may make more sense to keep the loans and do something else with your savings.

*1.6 percent? That's awesome.
posted by notyou at 8:14 AM on February 10, 2012

Canada example. I know someone who had a massive SL that had become much more so due to cumulative added interest. His dad - a mortgage broker - negotiated a lump sum payout that covered a small proportion of his outstanding student debt, but was close to the original amount that he owed.
posted by lulu68 at 12:08 PM on February 10, 2012

Congratulations on your savings!

Depending on the amount of money in question, the better option may be to park it in a CD or savings account for a rainy day. A young person in good health with no dependents should still have 3 months' living expenses saved against emergencies. In this economic climate, 6 would not be unreasonable. Should you need to borrow money in the future, it is virtually certain you will not find a loan at as favorable rates and terms as your student loan.

Also, does your employer have a 401k program? Are you contributing up to their maximum match? Are you maxing out your Roth IRA contribution? The tax advantages of either option almost certainly make these better choices for savings than paying down your student loan.

If you're squared away with retirement savings and an emergency account, then absolutely pay off your student loan and enjoy the interest savings and peace of mind.
posted by psycheslamp at 2:10 PM on February 10, 2012

I used to work for a student loan servicer and we sometimes got this question. The answer is always no.
posted by Lobster Garden at 3:13 PM on February 10, 2012

Well, this has certainly turned into an interesting discussion. Kindall got what I was looking for, I just didn't know the exact terminology for it.

Economics/finance wasn't my area of study, but it's my understanding that banks are strapped for capital right now, due to overleveraged lending. It's part of the reason Bank of America and other banks created a bunch of new fees for debit cards, etc (and backed off when they realized the measure might lose them money instead of make it). Banks have debts themselves - if they can get cash to pay off their loans, which may be at a higher interest rate, it's a good deal for them. Then there's the risk another shock to the financial system (Ex. Greece defaults, skyrocketing oil prices, etc) would set off a round of credit default swaps and send banks scrambling for actual money to make payments.

I did consider investing the money instead, but unfortunately, my interest is fixed at when the rates were higher. So unless anybody knows a investment with a guaranteed 5.75%+ annual return, I'm afraid it just doesn't make any sense for me.

If Lobster Garden is correct though, that's rather unfortunate.
posted by ndr at 5:01 PM on February 10, 2012

settling a non-deliquent loan for less than face isn't increasing any banks capital. It is decreasing it.

Secondly because of the federal guarantee student loans are very easy to pledge as overnight collateral - so easy to turn into cash.

(also - at the risk of turning this into a bigger argument - bank capital ratios are actually really really strong right now. The argument might be that they are lying about the value of their assets, but from a GAAP perspective they are much better capitalized than they have been in literally decades)
posted by JPD at 8:18 AM on February 11, 2012

their loans, which may be at a higher interest rate,

your loans are 5.75% and federally guaranteed. They can be pledged at the fed for something like .25%, I.e. I take your loan and ask the fed to discount it for me. Since it is federally guaranteed there isn't a haircut, so I given them 100 dollars worth of loan, they give me 100 dollars in cash and charge me .25% for it. I'm making 5.50 w/o taking really any risk at all. And even if you stop paying it doesn't matter because the DoE has pledged to make up the payments.

So you can see why it isn't really economically rational for a bank to give you a break.
posted by JPD at 8:31 AM on February 11, 2012

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