Federal student loan settlements are difficult to get, but are possible in some cases. The Department of Education can settle (also known as compromise) FFEL or Perkins Loans of any amount, and suspend or terminate collection of these loans. It will be difficult, however to negotiate a “good” deal. The Department of Education has not given out much guidance on what they are likely to accept but understand generally always, you’ll need a lump sum.
The Department has Standardized Compromise and Write-Off Procedures for use by guaranty agencies. These are for negotiated agreements between borrowers and guaranty agencies to accept less than full payment as full liquidation of the entire debt.
To summarize the guidelines:
Collection costs can be waived.
30% of principal and interest can be waived. If a guaranty agency chooses to compromise more than 30%, it cannot waive the Department’s right to collect the rest.
WARNING: These agreements will only stop guaranty agency collection activity, but you will still owe the debt. You can negotiate harder and try to get the Department or guaranty agency to cancel the debt. Also, guaranty agencies are permitted to accept these settlements, but they are not required to do so.
The Department has also issued the following guidelines for compromising Direct Loans:
Type of Compromise: Borrower Pays: Account Eligibility:
1.Waiver of Fees Principal and Interest All Debts
2.50% Interest + Fees All principal and 50% interest All debts
3.10% P&I 90% P&I All debts
4.Discretionary All debts
The Department also discusses general guidelines for compromises in its 2009 Private Collection Agency manual (see chapter 7). Note that there is an updated version of this manual, but the Department has not made it public.
Schools may also write off very small Perkins Loan balances.
There may be tax consequences if you get a student loan settlement. It is a good idea to consult a tax professional for more information.