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Ask Dave

Can You Settle a Student Loan?

James asks if it's possible to settle on a student loan.

QUESTION: James on Twitter asks if it’s possible to settle on a student loan.

ANSWER: Sallie May student loans, or federally insured student loans, means it’s federally insured. Translation: If you don’t pay it, the bank is going to get paid 100% by the taxpayers. The government is guaranteeing the loan. They have no reason to settle with you. If you have a $10,000 student loan and you don’t pay it, the bank gets $10,000 from the government. If you have a $10,000 credit card and don’t pay it, they get nothing. So they’ll settle with you to get something.

But on a student loan, they’ve got the government backing up the bank. So they’re not going to settle with you on the principal amount or on the interest. The only thing you can talk them down on are the collections fees, and they jack those way up. You can talk them through those back down to just the principal and interest. But the original amount you borrow, plus the actual interest that has never been paid, is guaranteed by the government, and so they’re going to get that from you or from the government. So they have no reason to settle with you. They won’t settle with you on those amounts.