You have two options: you can negotiate directly with your lender or work with a debt counselor to help you negotiate.
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Mayotte states that borrowers should consult an attorney who specializes in student loans in the event of bankruptcy or other significant disputes, or if the loan is likely to be beyond the statutes of limitations for collection.
These steps will help you start the process of settling your debts after consulting with a tax professional, a tax advisor, or a lawyer.
Possible drawbacks to student loan settlement
Gather Evidence: Lenders and loan servicers will often ask you for proof that you are unable to repay the amount owed. Documentation of financial hardships such as pay stubs and tax returns from the most recent year or proof of continuing expenses, such medical or childcare costs, will be required.
You can save money by paying a lump sum of cash to settle your debt. You may need to pay a large sum of cash. Federal loans, for example, might not waive collection costs. However, you will have to pay all principal and interest.
Check out the typical settlement procedures: It’s a smart idea to do some research before you start negotiations. Federal loans, for example, have very strict guidelines regarding acceptable settlements. Before you talk to your lender, you should ensure that you are comfortable with these terms. Mayotte says that every case is unique. Private loans can be obtained at 50 cents per dollar, but some borrowers are able to pay less.
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Your credit will be affected
You must be in default to settle student loans. Federal loans will mean that you are 270 days behind on your payments. Private loans are typically at least 120 days behind. However, the exact time frame may vary from lender to lender. You can make other creditors suspicious if you miss too many payments. This will cause your credit score to be severely damaged.
Taxes may be required
You may owe taxes if you pay off your debt. The IRS considers the income portion of the waiverd amount income. If the amount you have been paid is greater than $600, your loan holder will send a 1099 form to you. You’ll need to report the information on your tax return, and pay taxes.
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The Lender cannot guarantee that they will agree to your request
Although you may be able to make compelling arguments to your loan holder they are not likely to agree to your settlement proposal.
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Mayotte says, “Keep in Mind that the borrower is legally bound to the promissory notes they signed. A lender is not under any obligation to accept a settlement. Instead, a lender can choose to litigate for collection.”