The Student Loan Settlement is not a “Get Out of Debt Free” card. Here are some facts to help you understand student loan settlement.
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Although the federal student loan freeze under the CARES Act has been extended until May 1, 2022 many borrowers will still have difficulty resuming payments despite this extra time.
According to the Federal Reserve, 18% of student loan borrowers had fallen behind in their payments prior to the federal loan freeze.
What is a student loan settlement and when can it happen?
Betsy Mayotte is the president and founder of The Institute of Student Loan Advisors. While student loan settlements sound attractive, she cautions borrowers. She says that most borrowers should expect to repay their loans in full, as they have agreed to when they signed the promissory notes. “Essentially, the only reason a lender may have to settle is if litigation proves more costly than an actual settlement.
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Adam Minsky, an attorney who specializes in student loan law, and a contributor to the National Consumer Law Center, states that settlements can lead to a positive outcome, but only in certain situations.
Minsky states that only borrowers in default on student loans are eligible to negotiate a settlement. And default can have very serious negative consequences for both the borrower and any cosigner.
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There are many options for settlement
- Principal + Interest: Only your collection costs and fees will be waived with this settlement.
- 50% interest + principal: This settlement is available to you if you’re eligible. The collection costs and fees are waived and you will only be responsible for 50% of the interest accrued.
- 90% (Principal + interest): This settlement term allows you to pay 90% of the principal and total interest amount. All collection costs are waived.
- Discretionary: This is if you are unable to afford other settlement options because of extraordinary financial problems. Your loan servicer will need to submit the discretionary settlement request to the Department of Education to get approval.
Private Student Loan Settlements
Private loans can be issued by online and bank lenders, not the government. They don’t have the same regulations as federal loans.
Minsky says that federal regulations and guidelines govern student loan settlements. These regulations place restrictions and limits on these settlements. Although private student loans are generally more flexible, this can vary depending on the lender.
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Minsky says that there is no standard percentage. Student loan settlements vary widely depending on the type and lender of the loan, the borrower’s mitigating factors, and if the borrower has any legal defenses or disputes.