Debt Settlement and Student Loans. Will My Student Loan Lender Negotiate With Me And Reduce What I Owe? – Alexandria

“Dear Steve,

Long story short: i have student debt from the mid-late 1980’s. after graduating, i ended up working in careers that helped people, but not myself (financially!). i deferred and defaulted, but finally consolidated and got back on track. i only borrowed $25000, but after all this time (and many years of payments) i owe $60000. this is really crazy. on my monthly statement it says the pay-off would be $67000, which is far more than i could ever afford.

Can this be negotiated? i have a benevolent relative who would help me pay this off, but together we do not have $67000. what are my options? in this economy i am hoping the dept of education would welcome any money!


Dear Alexandria,

Yes, student loans are one of the nastiest debts you can owe. I’ve heard few, if any, successful negotiation stories with the government and private student loan collectors.

But the advantage is that if you have government backed loans and that gives you some options, including the IBR, Income Based Repayment Plan. It is a student loan debt repayment plan worth first looking into.

While in general student loans are no longer dischargeable in bankruptcy there is a difficult way to do it claiming that repaying the student loans creates an “undue hardship” on you. You’d need to contact a local bankruptcy attorney and discuss a Chapter 11 approach to doing this. If the bankruptcy attorney feels you have a chance at achieving this then that might be a reasonable approach.

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It would be a mistake to allow your relative to invest money in a solution that would not resolve the problem. But if the local bankruptcy attorney feels the Chapter 11 approach for you has a shot then an investment by your relative might be a good investment in you.

The best plan of action would be to talk to the local bankruptcy attorney first and then pursue the IBR solution second.

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Now you did mention that you worked to help others and that left you under-earning. If you worked in certain public service jobs your loans may have been dischargeable after ten years. See this fact sheet for more information.

To be eligible for public service student loan forgiveness the borrower must be employed full time (in any position) by a public service organization, or must be serving in a full-time AmeriCorps or Peace Corps position. For purposes of the Public Service Loan Forgiveness Program, the term “public service organization” means –

  • A federal, state, local, or Tribal government organization, agency, or entity (includes most public schools, colleges and universities);
  • A public child or family service agency;
  • A non-profit organization under section 501(c)(3) of the Internal Revenue Code that is exempt from taxation under section 501(a) of the Internal Revenue Code (includes most not-for-profit private schools, colleges, and universities);
  • A Tribal college or university; or
  • A private organization that is not a for-profit business, a labor union, a partisan political organization, or an organiza tion engaged in religious activities (unless the qualifying activities are unrelated to religious instruction, worship services, or any form of proselytizing) and that provides the following public services –
    • Emergency management;
    • Military service;
    • Public safety;
    • Law enforcement;
    • Public interest law services;
    • Early childhood education (including licensed or regulated health care, Head Start, and state-funded pre-kin dergarten);
    • Public service for individuals with disabilities and the elderly;
    • Public health (including nurses, nurse practioners, nurses in a clinical setting, and full-time professionals engaged in health care practioner occupations and health care support occupations);
    • Public education;
    • Public library services; and
    • School library or other school-based services.

Please update me on your progress by

P.S. Be sure to read ‘The Secret of Surviving Through Difficult Economic Times. What I Learned On My Journey‘.

Damon Day - Pro Debt Coach

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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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