Student loan negotiations?
October 7, 2007 8:56 PM   Subscribe

Student loan negotiations?

I've heard about people who default on their student loans and then negotiate a settlement that is something like 50% to 70% off what they owed, claiming they arent able to afford their full loans. Supposedly the student loan people think this is better than nothing and take the offer.

Is this true? If so what stops someone with a lot of student loan debt from doing that? Especially if they are willing to live with some black marks on their credit?
posted by damn dirty ape to Work & Money (17 answers total) 3 users marked this as a favorite
When I was digging myself out of debt I was able to settle just about everything BUT student loans. They wouldn't even talk about it. I had to pay back every penny in full.

However, my loans were taken out 15 years ago and the attempt to settle them was seven years ago at least, so perhaps things have changed. They were pretty open to reasonable payment negotiations, but not to a partial settlement.
posted by padraigin at 9:29 PM on October 7, 2007

I haven't heard about this specifically. But I have heard of law school grads who have gone into public interest, run out of funding, and not been able to meet their monthly payments. One girl I know was able to negotiate her monthly payment down and I think she didn't pay anything at all for two or three months, however I don't think any of her loans were forgiven. I don't think her credit was ruined either because she called them before just not paying. Apparently they were very willing to work with her though, so who knows what someone might be able to pull off.
posted by whoaali at 9:30 PM on October 7, 2007

I am almost positive you cannot negotiate student loans. Even if you die your student loans are not forgiven, next of kin has to pay them.
You can negotiate monthly payments down, but not the overall loan.
posted by Becko at 9:37 PM on October 7, 2007

Even if you die your student loans are not forgiven, next of kin has to pay them.

You are fucking kidding me. Can you cite this?
posted by sourwookie at 9:51 PM on October 7, 2007

I'll tell you why they don't accept offers in compromise.

Under the new Federal Bankruptcy Code... student loans are NON-DISCHARGEABLE!

The student loan lenders got with the Republicans in the Congress and hedged their bets BIG TIME.

The best you can hope for is to default big time and make them come after you... then they'll sell the non-performing loan to some reptilians who will sic their collections agents on you... and even then you can maybe get maybe 10% off after you figure in all the default costs and penalties and late charges, etc.

And for that privilege you get to ruin your credit for seven years, minimum.
posted by Mr_Crazyhorse at 9:53 PM on October 7, 2007

Next of kin dont inheret debt. They do get the estate before the nok.
posted by damn dirty ape at 9:53 PM on October 7, 2007

Student loans were non-dischargeable before the new BK code, for whatever that's worth.
posted by padraigin at 10:11 PM on October 7, 2007

All loans received under programs authorized by Title IV, of the Higher Education Act can be canceled for several different circumstances including: (1) in the event of your death; or (2) if you become totally and permanently disabled after the loan is disbursed.

A broad swath of public service workers - including school, government, health care, nonprofit and military employees - can have their remaining student loan balances forgiven after 10 years in public service and 10 years of loan payments under a bill awaiting President Bush's signature. [I think I heard it was signed.]
posted by salvia at 10:11 PM on October 7, 2007

@ padraigin: If I posted incorrect information, my apologies to mefi.
posted by Mr_Crazyhorse at 11:28 PM on October 7, 2007

If you can get an income-contingent repayment plan, you may end up repaying an amount (of principal) that is less than the original loan, with the remainder forgiven after 20 or 30 years of repayments. At the time that the rest is forgiven, that amount is all taxable as income, though, so you need something set aside to pay the taxes eventually.

It's not the kind of negotiated settlement that you were describing, but it is the main way I know of that lets the repayment be less than the loan amount.
posted by dilettante at 3:47 AM on October 8, 2007

Keep in mind that there's a big difference between federal student loans and private student loans. Most people, when talking about "student loans," are talking about federally-insured student loans that a student must qualify for through their institution of higher education. As far as I know, those have always been non-dischargeable--so there's no reason at all for a lender to ever negotiate.

However, some banks offer private student loans, which are pretty much just regular loans targeted at students. They don't have sweet interest rates--in fact, the interest rates are more in line with what you'd pay on borrowing money for a car--but I imagine those loans have no special gov't protection that prevents them from being discharged in bankruptcy. Thus, lenders are probably much more willing to settle for 30-50% of the total loan when the borrower starts defaulting on private student loan debt.

The vast majority of people have federal students loans (even if they are serviced through a private company). If you had private student loans, you'd know it by the screams of agony you'd make every time you opened up a student loan bill and saw a 14% interest rate. (It's small comfort to know that I could default and negotiate down the total amount paid. Sigh.)
posted by iminurmefi at 7:19 AM on October 8, 2007

The vast majority of people have federal students loans (even if they are serviced through a private company).
Are you sure about this?
When we were shopping for financing for our son's technical school education, we were constantly being steered to adjustable-rate private loans. Finding a federal loan that could adequately cover his education proved pretty damn impossible. The best we could find were the woefully next-to-useless Stafford loans.
posted by Thorzdad at 7:54 AM on October 8, 2007

Even if you die your student loans are not forgiven, next of kin has to pay them.

That is an urban myth. Any debt is paid from the estate, and you inherit what is left, if anything. No one can force debt on you, including your dead relatives.

When I bought my house, I signed a contract saying that my next of kin were responsible for the mortgage debt. My next of kin did not sign the contract and are in no way bound by it.
posted by malp at 7:56 AM on October 8, 2007

No one can force debt on you, including your dead relatives.
Unless you, as the parent, had to co-sign the loan. And many, many parents have had to co-sign on student loans.
posted by Thorzdad at 8:06 AM on October 8, 2007

Thorzdad, you're right, that's probably an overgeneralization--based on my experience at a private college, many more of my classmates had federally-backed student loans than had private loans. Staffords are limited, but PLUS loans (which are federally-backed but made to the parents rather than the student), unlike Stafford or Perkins loans, don't have a borrowing limit, as I recall. Also, PLUS loans have interest capped at around 9%, which is much better than private loans.
posted by iminurmefi at 9:52 AM on October 8, 2007

Even if you die your student loans are not forgiven, next of kin has to pay them.

That is not true. In the master promissary note it says that your loan may be forgiven if (1) you die or (2) you are completely disabled and can not work. I remeber, because I laughed my head off with the wording.

Anyway, I don't think you can negotiate student loans, except with certain loan payment plans. I think I saw a plan that if you can't pay it after 20 years it MAY be forgiven, but I could be completely wrong.
posted by slc228 at 11:03 AM on October 8, 2007

I can spell darn it!
posted by slc228 at 11:04 AM on October 8, 2007

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