- December 7, 2020
- Posted by: Carter Davis
- Category: News
Settling federal student loan debt is a rare occurrence, but it may be necessary for some people who can no longer pay off their loans and have no other options. If you feel as though you have nowhere to turn and a mountain of federal student loan repayments, it may be time to try for settlement. Before you make this important decision, know the reasons for federal student loan settlement that could apply to you.
You Don’t Qualify for an Income-Driven Repayment Plan
Income-driven repayment plans have saved many graduates from defaulting on their federal loan repayments. These loan repayment plans change the monthly amount you owe based on your taxes and yearly income, which can result in extremely low payments. However, low payments can mean high interest that will build up over time. Not everyone is qualified for an income-driven repayment plan, but you can typically consolidate loans that don’t qualify into a loan that does.
Your Loans Have Begun Defaulting
Even when you’re on an income-driven repayment plan, the payments may be too high, and your loans may start defaulting. When this happens, you can consider settlement as an option. Loans don’t begin defaulting until after nine months of missed payments. The federal government will not consider you for student loan settlement unless your loans are defaulted. If you haven’t officially defaulted on your loans, the federal government will still consider you able to pay the full repayments. Don’t start the process of defaulting on purpose just to be able to settle your debt. This is a risky move that will lead to financial turmoil. Only default when you have no other options. Once the settlement process is finished, you can begin fixing your credit score that the defaulted debt has likely destroyed.
You Have a Lump-Sum Payment Ready
A settlement will provide an end to your federal loan, but it’s important that you prepare yourself to pay a hefty price first. You should only complete a settlement once you have enough money to pay the requested lump-sum payment. The federal government doesn’t often settle for less than 90% of the remaining amount, and it will only give you 90 days to pay it. Don’t forget that whatever you chop off the loan will be considered taxable income, and it will require action on your taxes.