If you took out student loans while in college, then you may be in the repayment phase. If you find that you’re having a hard time making payments—or if you’re already behind and in default—you’re not the only one. More than 11 percent of graduates end up in default within three years of beginning to pay the loans back.

If you are in default on a private student loan or federal loan, then you’re probably already experiencing some of the highly negative repercussions; you may have had your federal tax refund garnished and applied to your balance, been unable to get another loan, or had your application for an apartment denied. You might have even seen your paycheck garnished.

If you’re truly having difficulty repaying your student loans, there is an important option to look into: student loan settlement. It can be a challenging route to take, but if you meet the criteria, it can be done.

What Settling Student Loan Debt Means

Settling is the act of paying a lump sum that is less than the balance due. In return for getting a lump sum all at once instead of having to deal with payment schedules from a borrower who is unable to stay on time with their payments, the lender agrees to consider the debt paid in full even if they received less than the balance owed.

While this might sound like a great way to get out from under your defaulted loans, read on before calling your lender. There are criteria you’ll need to meet to settle student loan debt—and the rules for federal and private student loans are different, so you’ll need to understand the differences.

How to Settle Student Loan Debt Federally

With any settlement, it might be considered among the last options for a borrower. For the lender, who is losing money on the deal, it’s a last-ditch effort to recover as much of the money they lent as possible.

There are three types of student loan debt settlements for federal student loans.

  • Standard compromises allow you to either:
    • pay the loan itself without any collection fees
    • pay the current principal and half the interest
    • pay least 90 percent of the remaining balance.
  • Discretionary compromises allow you to pay less than the standard compromise, but you’ll need approval from the Department of Education to work out that arrangement with the collector.
  • Nonstandard compromises are only offered to a very select few borrowers.
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Whatever the agreed-upon amount is, you’ll need to already be in default and pay the student loan settlement amount within 90 days through a certified check or credit card (no personal checks or cash). You will also receive a Form 1099 for your taxes since you will be expected to pay taxes on the forgiven portion of the debt as income.

How to Settle Student Loan Debt Privately

With private student loans, you’re dealing with a private lender instead of the federal government. That can work both for and against you depending on the situation. Private lenders cannot garnish your paycheck if you’re in default without first getting a civil judgment against you, unlike the federal government. They can, however, do all of that and more if they do decide to sue you.

Each lender has its own criteria for settling a debt and is under no obligation to settle at all. In order to get a lender to agree to a student loan settlement, you’ll need to be in collections already; they won’t allow a settlement if your debt is in good standing and you’re still making payments. You’ll also need to be able to pay at least half of the debt in a lump sum before you even request a settlement—although you can start negotiations at 25 percent of what you owe. Check with your specific lender to see what options they have available for settlements.

When is Student Loan Debt Settlement Not an Option?

Just because you’re in default doesn’t mean student loan settlement is an automatic option. If you strategically defaulted on the loan so that you could pay less than what you owe in a settlement, you could find yourself with wrecked credit and a full loan balance due plus interest. Lenders see strategic defaults as fraud. If you have enough money to make your payments or you’ve suddenly gotten a raise, your lender will also see that as an ability to pay and likely won’t approve a student loan debt settlement.

 If you have private student loans and your lender has already gotten a judgment against you in court—allowing them to garnish your wages or take your income tax return—you probably won’t be able to get a student loan settlement approved. To get the best chance of settling your debt, it’s best to approach your lender long before they take you to court.