Just about every college graduate is saddled with student debt nowadays. In 2017, the average graduate left school with a degree and $39,400 in debt. American student loan debt now equates to $1.48 trillion, which is $620 million more than the country’s combined credit card debt.
That’s a lot of money. And when you’re trying to earn a living and survive, figuring out how to repay your loans in this lifetime feels impossible. But don’t lose hope; there are lots of options to help you get out of student debt.
In this post, we’re going to take a look at one option called debt settlement.
What to Do if You Can’t Afford Your Student Loan Payments
Many graduates struggle to keep up with their student debt repayment plan. In fact, 11 percent of college students default on their loans within the first three years of repayment.
If you’re currently in this situation, there are ways to fix it. Debt settlement is one of them.
What is student debt settlement?
When you settle a loan, you make an agreement to pay a lump sum of money that’s less than your current balance. You may be wondering why a lender would settle for less money than they’re owed. Ultimately, it’s a matter of choosing something guaranteed over something unpredictable.
Lenders can spend years trying to collect payments from borrowers, but debt settlement guarantees they’ll be awarded a set amount of money. In some cases, this assurance of immediate repayment is a fair trade-off for the difference in the settlement and original balance.
The Three Types of Student Debt Settlements
Federal student loans can be settled in three ways:
- Standard compromises.
- Nonstandard compromises.
- Discretionary compromises.
Standard Student Debt Compromise
This type of debt settlement gives borrowers a few options. You can choose to pay off the loan in its entirety without collection fees, repay the current principal balance and half of the accrued interest or pay at least 90 percent of the current outstanding balance.
Discretionary Student Debt Compromise
This type of settlement allows you to pay less than the standard compromise, but you’ll have to get approval from the Department of Education to work out an arrangement.
If you’re requesting a discretionary settlement due to financial hardship, you’ll have to provide evidence to support your claim. Some of the documents you’ll have to submit include a financial statement, current pay stubs or proof of unemployment, copies of your most recent tax returns and any other supporting documentation that proves your inability to repay your debt.
When you request this type of settlement from your loan company, they must submit the information you provide to the Department of Education for approval. Your request will either be accepted, rejected or returned with a counteroffer.
Nonstandard Student Debt Compromises
A nonstandard debt compromise is only awarded to a select number of borrowers. When it comes to private student loans, a nonstandard compromise is offered by the collection agency and has nothing to do with the Department of Education.
Other Options Before Debt Settlement
Alright, you may be thinking, but what if I can’t even afford the settlement amount? If you don’t have the means of paying off your debt in a lump sum, then there are some other repayment options to consider.
Income-based repayment calculates your monthly bill based off your discretionary income. Discretionary income is the amount that your adjusted gross income exceeds the federal poverty line by 150 percent.
Income-based repayment amounts are always less than 10 percent of your gross income, and because the monthly repayment agreement is based off how much you make and not how much you owe, managing student debt is a lot easier.
When You Should Consider Debt Settlement
If you find yourself facing a relatively small amount of student debt, e.g., under $10,000, you may find it easier to settle and pay off as much as you can. Debt settlement companies and student debt consultation companies can help you weigh all your options and determine whether or not settling or revisiting your repayment plan is the right choice for you.