After nearly 6 years of advising borrowers with all types of debt, I have never seen a lender accept a settlement for less than the full balance on any type of loan when the borrower is current, deferred, or in forbearance.
I decided to write about this subject due to the large volume of inquiries I receive from borrowers hoping to settle their federal loans, private loans, or credit cards when they are current, making payments, or on forbeareance.
To understand why virtually no creditor will accept a settlement on an account that’s current, we need to look deeper into the psychology of lenders and their motivations to lend money in the first place. Here’s more information about debt settlement with Navient.
When a lender loans a borrower money, I’m sure we are all aware that they are not doing it out of the goodness of their hearts. Of course, the lenders hope to profit or gain revenue from interest accrued over time, so that they make back the original amount they loaned to borrowers plus interest that has accrued. When a borrower has been making regular payments, or is on forbearance or deferment (for federal or private student loans), the lender can reasonably believe based on past performance that the borrower is going to make that payment the next month; or continue on their forbearance or deferment, while accruing interest which they will eventually have to pay.
Lenders would not even want a full payoff in this scenario, though they will accept it. No; their main goal is to make as much interest as possible over the lifetime of the loan. This is one reason why credit card companies fought so hard against the 2009 CARD Act, which required credit card companies to disclose, among other things, how long it would take to pay off an account by making minimum monthly payments. This information is required to be listed on monthly credit card statements. When this first took effect, many people were shocked at how much interest their credit card companies were making over time on the minimum payments. In some cases, the total amount repaid including interest and principal can be well over twice the original amount that was borrowed.
By understanding the psychology of lending and seeing what lenders hope to accomplish, we can deduce that accepting settlement on a current account is the exact opposite of lender’s goals and goes directly against their business model. They know statistically that most current borrowers will continue to stay current, even when it comes to federal loans which have a much higher default rate than other types of loans.
Only when the original contract is broken and the account has gone significantly delinquent does the possibility of settlement even open up. The longer an account goes without payment, the less likely the creditor is to get any payment in the future (this does not apply to federal loans), which could result in them having to eventually classify the account as a nonperforming asset, or cause them to pursue expensive legal collection tactics.
Federal student loans however, unlike any other type of unsecured debt, are able to be forcibly collected without legal action like having to take the borrower to court. The federal government has extraordinary collection powers compared to a private company, which is one of the reasons why federal loans offer very limited settlements even when accounts are significantly behind. So while it may be possible to get a significant reduction on a normal unsecured debt 6-12 months after the last payment has been made; the best case scenario for federal loan settlement on a defaulted account is a 70% payoff of principal and interest that has to be paid within 90 days. This is still rare and the federal government is under no obligation to offer such settlements. Even worse, the amount of fees, late charges, and credit damage that will accumulate by going into default will significantly cut in to the already limited potential savings. Not to mention, many borrowers will be taxed on the amount saved as if it were additional income.
So, we can see that settlement options are quite limited even for those who are significantly behind on federal loans. For those on forbearance, deferment, or a repayment plan and are less than 9 months behind; there is virtually no way to settle for any type of reduction. The government simply has zero incentive to accept such settlements.
This also holds true for private loans and credit card debt that is current, although private lenders can offer significant settlements after the 6 month delinquency mark known in the industry as “charge-off”. However, the accumulation of late fees and the 30, 60, 90, 120, 150, and 180 day negative credit marks makes this unpalatable for many who are current and paying as agreed or deferred on a private loan or credit card.
Settlement should really be considered a last resort when all other options have been exhausted, and ideally the borrower is already behind or will inevitably have to stop making payments due to financial circumstances. Private lenders are also under no obligation to settle and in many cases feel that they have the upper hand over borrowers; and are more than willing to pursue aggressive collection activity instead.
Obviously, the idea of settling an account for less than the balance or the mythical “pennies on the dollar” is very appealing. The reality of settlement shows that it’s only available in very limited circumstances, and is not something the lenders are obligated to offer. The fact that signifcant credit damage (likely to lower score by up to 100 points or even more) is the “cost of admission” for any type of settlement is also very discouraging, especially in the case of federal loans which only offer very limited settlement amounts even then. Settlement is usually only a good idea when the borrower is already behind and the the damage to their credit score has already been done.
The good news is that if you are current and want to find a better way to pay off your federal student loans, there are many free options available incluidng payments based on income and industry-specific forgiveness programs; all offered through the Department of Education in conjunction with their federal loan servicers. The forgiveness elements of certain payment plans and the Public Service Loan Forgiveness program offer a more realistic way for federal loan borrowers to cut down the total amount of principal and interest they end up paying over time.
For those with unsecured or private loan debt, refinancing or negotiating better payment terms could provide some relief without having to tank your credit for settlement. However, those options are limited, which makes the prospect of a strategic default an option to consider if you’re unable to refinance or get a better repayment plan for your private student loans. If you are already behind on your private student loans, it may be possible to settle but depends on the lender and collection agency’s policies. It can be very difficult to negotiate and properly execute a settlement on your own, and hiring a professional negotiator can actually save you money (the negotiation charge included) as well as time and stress, versus attempting it on your own. Contact us today to see how we can help you settle your private student loans for less. We can even guide you through the strategic default process if you’ve exhausted all other avenues of relief for your private student loans.