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Student loan debt settlement is one of the options for those who are struggling with their debt payments. But while it is an option, you need to possess the right qualifications before you can opt for this debt solution.
Debt settlement is when you pay your creditors with a lump sum payment that is usually smaller than your current balance. You will convince the lender or creditor to accept this smaller amount and whatever it cannot cover will be considered forgiven. There are many techniques to get them to agree to this. One is to tell them that if they will not agree to settle with you, you have no other choice but to opt for bankruptcy. Most of the time, people going through debt settlement are on the brink of bankruptcy.
In student loan debt settlement, you cannot use the bankruptcy argument. That is because student debt cannot be discharged in bankruptcy. It is one of the debt types that will not be affected when you file that you are bankrupt. This makes the settlement process a bit more complicated as a student loan debt relief.
Current predicament of graduates and their student debt
Settling your debt becomes an option for consumers when they have stopped paying their monthly obligations or they are just about to do so. The only way that they can qualify for this debt solution is when they are in a real financial crisis.
Well if the qualification is a financial crisis, then a lot of consumers and new graduates will qualify for debt settlement. Based on the information from the Student Aid website, the delinquency statistic for the past two quarters are as follows:
Direct Loan Portfolio.
In Q3 of 2013, out of the 27.8 million student loan borrowers, 2.1 million have defaulted on their student loan. The amount of delinquent loans is $30.5 billion of the total $569.2 billion.
In Q4 of 2013, out of the 29.2 million student loan borrowers, 2.2 million have defaulted on their student loan. The amount of the delinquent loans is $33.8 billion of the $609.1 billion total debt.
The percentage of direct loan delinquents in Q4 slightly went down to 7.53% from 7.55% of Q3.
Federal Family Education Loan (FFEL)
In Q3 of 2013, out of the 22.9 million FFEL borrowers, 4.4 million have defaulted on their student loan. The amount of delinquent loans is $58.8 billion of the total $429.5 billion.
In Q4 of 2013, out of the 22.5 million FFEL borrowers, 4.4 million have also been delinquent on their student loan. The amount of the delinquent loans is $59.7 billion of the $423 billion total debt.
The percentage of FFEL delinquents increased in Q4 to 19.5% from 19.2% in Q3.
Source: National Student Loan Data System (NSLDS) or http://studentaid.ed.gov/sites/default/files/fsawg/datacenter/library/PortfoliobyLoanStatus.xls" target="_blank"
The report defines the default as loans that are over 360 days delinquent. Overall the percentage of delinquent borrowers slightly decreased from 12.8% in Q3 to 12.7% in Q4. Although there is a decrease, it is too small to be considered a real improvement.
And when it comes to improvement, the job market does not give much confidence. Based on the data from the Bureau of Labor Statistics, the job market in October was not as promising as we hoped it will be. This is probably because of the government shutdown and the persisting issue about the debt ceiling. The highlights of the report for the month of October are as follows:
Civilian labor force decreased by 720,000.
The unemployed for more than 27 weeks or more is at 4.1 million.
Part time employees changed slightly to be 8.1 million.
815,000 are discouraged workers - meaning they are not looking for a job because they feel that there is no job for them.
How to settle your student loans?
The statistics above gives us reason to believe that the borrower’s ability to pay the student loan is not improving at all. If the job market does not improve soon, the number of borrowers falling behind on their payments could increase. This means more people may look into student loan debt settlement to help with their monthly payments.
But how exactly can you use debt settlement for student loans? FinAid.org defines it as offering a lump sum payment for a portion of the debt that equivalents the full payment. The site is firm to say that it is not a new payment plan. There are two ways that the US Department of Education want to get their settlement payment.
Lump sum payment to be received within 90 days of the offer.
Installment payments that has to be completed within the fiscal year (October 1 to September 30).
Here are the other important facts that you need to know about student loan debt settlement.
The US Department of Education will not entertain settlement offers from debts that are involved in fraud or are results of a court judgement.
The US Department of Education will not settle for anything less than the default claim on a FFELP loan or principal balance of a direct loan. They will also not accept anything less than the recovery rate (percentage of disbursements). Most of the time, they accept at least 115% of the default claim or loan balance - but they can accept lower than that if the default is recent.
The US Department of Education considers settlement offers together with the cash flow being received from income tax refunds or wage garnishments.
Delinquent borrowers are advised to begin their negotiations by offering to pay half of the current amount owed less the amount of the default claim.
Debt collection agencies are authorized to agree to settlement that also result in the waiving of collection fees, 90% of the principal and interest balance or the full principal balance and half of the accrued unpaid interest.
Tips when settling your student debt
If there is one thing that you need to remember, it is that student loans need to be repaid at all cost. Obviously, settling student loans will not offer much debt reduction compared to other types of debt. But if that is what will get you out of debt, you may want to go through with it. A small reduction is better than nothing. But whatever settlement agreement you go into, make sure that you remember these tips:
Get everything in writing. It is very important that you specifically ask them to include in the document that the rest of your debts will be forgiven once you have paid the settlement fund.
Never agree to an amount that you cannot afford to pay. If you are dealing with debt collectors, they usually profit from commissions on the settlement fund that you will both agree on. So expect them to try and get more out of you.
Call the US Department of Education if you feel like the negotiation with debt collectors are going nowhere.
Know about the FDCPA (Fair Debt Collection Practices Act). Although the employees of the US Department of Education is not under this law, the debt collection agency that they will hire is. Do not let yourself be abused or bullied into paying more than what you can afford.
The settlement fund is ideally something that you need to possess already so you can successfully settle your dues before the time limit. If you do not have the money, you can opt to borrow from a friend or relative to help you out. If you get them to agree, you can lower your debt amount and help control the interest rate on your new loan.
You can also use your tax refund and have it considered as part of the settlement - but only if the release falls under the 90 days period after you make the settlement offer.
In the end, student loan debt settlement is effective for people who are in a real financial crisis and cannot afford their monthly payments. But do not expect too much of it and make sure you have a plan in place for the settlement fund that you have to pay off.