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What is a Reasonable Debt Settlement Offer for Federal Student Loans?


Dear Steve,

I have a student loan debt (30K) from 1983-1988. I consolidated in 2000 and now the total is almost $90K. What would be a reasonable offer-in-compromise? And, who would I be in touch with? These are federal loans. Thanks.

What is considered a reasonable offer-in-compromise? Who decides this?



Dear Jonie,

In general, the ability to accept a settlement on federal student loan debt is restricted by policy. And even if they would settle the rules for obtaining a federal student loan settlement are fairly restrictive. See this post.

Bottom line is the servicer or collection company is not authorized to discuss settlement with you until “other repayment options have been exhausted.”

Even if they get to discussing a settlement it will be 90% of what you owe now. But generally, it takes defaulting for more than 270 days when more penalties, fees, and interest are added to your loan before you can get them to talk compromise. By that time your balance will be much higher so, in reality, you’d have to come back and offer about what you owe in full today.

The only times I have seen the government go lower is when the Department of Justice sues the consumer over a defaulted debt and then in inconsistent situations, I have seen them accept less.

The other time has been as the result of an Adversary Proceeding when a consumer files bankruptcy and then sues the Department of Education to discharge the debt. Sometimes a reduction in the debt is achieved. You would need to discuss both of these situations with an attorney who is licensed in your state.

Outside of those situations, the imperfect but the best way to lower your monthly payment is going to be through some income-driven repayment plan. Income-driven repayment plans can lower your payment as long as you qualify but will increase the balance you owe.

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