Should I Settle My Student Loans or Increase My Mortgage Down Payment?


Dear Steve,

I have a good bit of student loan debt and would like to get a mortgage, so I’m torn between down payment and settling loan debt.

I have federal and private loans with Navient, around $129,000 worth, with IBR taking care of about $90k of the federal ($0 a month owed for those with IBR) but I pay about $388 a month for the private loans still. It would be about $40k to pay off the private loans, and I could only spare maybe about $20k to pay off half so I’m wondering about settlement of the private loan debt. I read your response to someone who likewise wanted to negotiate a settlement and it sounds like you have to let your student loans go into default for a period before they’ll consider settling, but this negatively impacts credit.

My primary goal at this time is to get a mortgage for a home because rents are ridiculously high here, and it would be the greatest impact on savings I could have – but – I need a down payment and of course good credit. I could throw all the money I have at my private loans but then there goes the down payment. I’m wondering if you think it is worth it to let my private loans default in order to try negotiating a settlement in spite of the impact on my ability to get mortgage. Do you know how great that impact would be? Many thanks,



Dear Shannon,

I think you managed to answer your own question.

Private student loan lenders will require you, because of their internal process, to become significantly past due. At this point they will either settle or sue. Either way it will negatively impact your credit at the time when you will need good credit to get your mortgage.

There is always the issue of the level of private student loan debt might impact your debt to income ratio and lead to a slightly higher interest rate on your mortgage but that is probably the lesser of two evils here.

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In a perfect world you should consider settling the private student loan debt first, recover from the credit hit and then focus on rebuilding your credit for about a year before you purchase your new home. That would give you the best of both worlds.

As far as the impact of the settlement your credit report would show a current delinquency or recent delinquency and part of the debt written off. In order to judge the impact of a specific lender you’ve need to consult with your mortgage broker. You should certainly do that before you take any action or make any assumptions.


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Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
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