Fact or Fiction: Can I payoff my student loans with a lump sum?

Michael Lux Blog, Student Loans 37 Comments

Smart borrowers are always looking for opportunities to save money on student loan payments. One common reader question looks something like this:

I owe $15,000 on my student loan. If I’m able to pay my lender a lump sum of $10,000 now, is there a way to get them to count the loan as being paid in full?

Settlements for pennies on the dollar do happen. Unfortunately, this practice is more common for medical debt than it is for student loans. The biggest reason is that bankruptcy is much more difficult for student loans. Lenders know that borrowers have little choice but to pay the debt back in full.

That being said, there are limited circumstances where a lump sum payoff can work…

A Student Loan Partial Payoff Example

Suppose you have $30,000 in student debt and will be paying it off for the next 25 years. If you are fortunate enough to have access to $22,000, you may wonder if your lender would be willing to take the cash up from and call it even. In some ways, the transaction makes sense for both parties. You pay way more than what is due, but you save money over the life of the loan. The lender gets a ton of cash much earlier than they expected.

Win-win, right?

Let’s Make a Deal Doesn’t Work

The problem with this approach is that it runs counter to how lenders think and plan. The exact amount of money in the lender’s bank account at the present time is not the lender’s biggest concern. They are usually thinking long-term. It is the reason that your lender wants you to pay the minimum over the life of the loan rather than paying it off quickly. Reducing principle is just you returning the money they gave. Collecting interest is how lenders make money. (This is why negotiating a lower interest rate is usually easier than arranging for a loan payoff.)

A lender accepting a large partial payment instead of the full balance doesn’t make business sense. They don’t want the money back right away. They make money on interest and fees, so from their perspective, you settling your debt isn’t a win for them.

As a result, if you call your lender, no matter how persistent you are, you will almost never be able to negotiate a settlement. The best you can do will likely be to pay off your balance in full. Even if it doesn’t seem like a win, it is huge for you. By paying off the loan sooner rather than later, you avoid months or years of interest payments to your lender.

But Wait… I’ve heard of people settling their debt for less than they owed.

The stories you have heard are true. From time to time, people do settle their student loan debt with a lump sum for a fraction of what they owe.

The detail that is usually left out in these stories is that the borrower in question was way behind on their loans and severely in default.

In this limited circumstance, lenders are willing to play let’s make a deal. Why? They may realize that this is a debt they may never collect on. If they have the option of X dollars today or possibly zero dollars in the future, they will take X dollars today.

If you are caught up on your student loans, your lender knows there is a high probability that they will be able to collect the debt in full… so why would the negotiate a lower payment?

Beating the system

There is definitely the temptation to try to get clever, and instead of making payments on your loans, saving the money. As time passes, you can amass a huge settlement amount, and your lender can start to get desperate. After the loan has been in default for a while or when the lender is on the brink of taking you to court, you then make your offer.

This approach is incredibly dangerous and could cost you far more money in the long run.

For starters, it will ruin your credit score. While credit score may be just a number, it can mean the difference in owning a house vs. renting. It also dictates the interest rate in any loans that you may acquire. A good credit score has real financial value, and throwing it away for the chance to save a few bucks is a bad idea.

The other thing to remember is that while you are not paying and trying to scare your lender into settling, your balance continues to grow. Interest accrues daily and your balance increases. Plus, the late fees pile on. Each missed payment triggers more late fees. Falling off the student loan grid long enough to scare your lender into a settlement will also mean your balance is dramatically higher than what you started.

I have a huge chunk of change, but not enough to pay off the loan… so what do I do?

There is no trick or shortcut to use this money to get your entire debt off the books. If you have enough money to pay off most of your student loan balance, send in the big check. It won’t get rid of your loan entirely, but it will put a huge dent in what you owe. It will also mean much less interest for your lender each day. It may not be your ideal situation, but it is much better than just paying exactly what your lender wants each month.

However, before making that huge payment, be sure to consider other financial goals like retirement, an emergency fund, and buying a house.

Even though most borrowers will not be able to get their debt wiped away with a partial payment, they can still make a huge dent in the interest that is working against them on a daily basis. It isn’t the ultimate goal, but it is a huge step forward.

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michael
michael

can you get a payoff letter for 2 of the loans you paid if you still owe more student loans

The Student Loan Sherpa
Reply to  michael

Your lender should be able to provide a payoff statement if you want to just payoff a couple of loans.

starving graduate
starving graduate

I am 58 years old and have 55,000 in student loans. I am very delinquent. I have an opportunity to get a lump sum payment on a pension, I have from a former employer. I have $40,000 available before taxes. Is there a way I can use it to pay my student loan before taxes? Or aa tax break if I use it for that?

The Student Loan Sherpa

Tax breaks for student loans are very limited. You can get a deduction of up to $2,500 per year paid towards student loan interest, but that is all.

Loan
Loan

I have $30,000 lump sum to pay off my student loan. First loan is about $30,000 with 5% interest. Second loan is about $100,000 with 7.9%. I want to use the lump sum to pay off both but which one? Or split in half?

The Student Loan Sherpa
Reply to  Loan

That is a really challenging question. I’m going to assume these are both private loans. If one is federal and the other is private, my opinion would be to pay off the private debt first.

Assuming they are both private:

The advantage to using the $30,000 to pay off the $30,000 loan is that it will eliminate one loan forever. This can be a huge step forward. It would also eliminate one monthly payment.

However, using it towards the second loan with the high balance and high interest rate will help you save the most money in interest.

Put another way, psychologically, paying off the smaller loan completely may be preferable. Paying off the higher interest loan is better from a purely accounting perspective.

One other thing to think about. Are you able to refinance this debt at a lower interest rate? If you can refi the big loan at a lower rate, it might change your math and strategy.

Xander
Xander

My Wife has Student Loans at approximately $73,000, but has already accepted a forgiveness program where she will be paying about $25,000 over the next 15 years, but she still has the option to pay off the whole amount. We learned we are going to be coming into some money, and we could pay off all our debt except the Student Loan, and have enough to buy a house for cash. We could also pay off all debt and the Student Loan, and wait for a house for a few years. We are kind of on the fence about what to do, any help?

The Student Loan Sherpa
Reply to  Xander

Waiting for forgiveness vs just paying off the debt right away can be a tough decision. What is best for you will depend upon things like your aversion to debt and risk tolerance, so I don’t think its my place to say what the best route would be.

Additionally, there are a couple things not mentioned in your question that I think would be important in any analysis: how certain are you that this forgiveness program will come through? If the debt is forgiven after 15 years, will it be taxed? (forgiven debt is normally taxed)

These factors could all influence my decision making… especially if the numbers between the two options end up being close.

Mary Thoj
Mary Thoj

My husband has about 8K in student loans that he hasn’t paid off in years. It was probably much lower than that a couple of years ago but because interest and late fees tacked on it’s up to 8K. It’s not as bad as others but I wanted to know what kind of impact will happen to his credit score if paid off in full and how long it will take for him to build it back up? I was planning on negotiating but after reading this, it seems like it would just hurt him even more in the long run so just want to pay off the damn thing in full. Thanks for your help!

Elger Routh

I have about $15,000 student loan for a tenure of 10 year. I have talk to my lender for foreclosure of the loan, but they are charging for 1% foreclosure fee. Do i really need to pay this fee?

The Student Loan Sherpa
Reply to  Elger Routh

by foreclosure, do you mean the loan is in default?

Austin
Austin

My principal student loans were for $22k, (Federal loans) now it is $32k with interest accrued after 8 years, even though I have never defaulted. I am getting an inheritance and want to pay the principal balance with a settlement and have the interest forgiven. If Navient refuses, can I move to a different country and never come back? How do I tell Navient that in better language?

The Student Loan Sherpa
Reply to  Austin

Getting them to forgive 10k is a huge ask.

How close are you to getting your loans forgiven? If you have been making payments for 8 years, you might be making a lot of progress towards forgiveness. I’d investigate the forgiveness route first.

As for your last question, I can’t think of anything you could say to Navient to get them to waive 8 years worth of interest.

Nile
Nile

3 years ago, I was injured on the job and have since been declared 100% disabled and unamenable to rehabilitation by a Vocational Expert. I’m unsure about the process of having my loans forgiven because no single doctor throughout my case has deemed me 100% disabled. They have all written letters in agreement with the Vocational Expert though. Should I try going through the forgiveness process by sending in copies of the Vocational Experts report and the corroborating letters or should I try to pay a lump sum settlement with a portion of my worker’s comp settlement?

The Student Loan Sherpa
Reply to  Nile

Are these federal loans or private loans?

Nile
Nile

Thank you for replying! They are all consolidated into one federal loan. ~90k principle/~13k interest. I made my monthly payment (IDR) for a few years, but the payment has been 0 since shortly after the accident.

The Student Loan Sherpa
Reply to  Nile

If you are permanently disabled, you are eligible to get your student loan balance discharged completely.

You can read more about the process and requirements here: https://studentloansherpa.com/student-loan-forgiveness-programs/#Death_Disability_Forgiveness

lissette
lissette

Hi there! My co-signer is permanently disabled and unable to help me with 200k in student loans. While she was working she was able to help me and even with her disability she helped for a little bit. Will I be able to remove her and perhaps at least part of the loan?

The Student Loan Sherpa
Reply to  lissette

I’ve never heard of a situation where a co-signer disability caused part of the loan being discharged, but that doesn’t necessarily mean it is impossible.

Generally speaking, lenders are usually hesitant to release a cosigner from a loan, especially if the primary borrower is struggling to pay. You can read more about cosigner releases here: https://studentloansherpa.com/guide-removing-cosigner-student-loan/

Rod
Rod

given the current Covid-19 environment… do you think that Lenders would be more likely to negotiate?

The Student Loan Sherpa

I still think trying to negotiate a payoff will be a challenge, especially if you are current on your loan… that being said, I think lenders will be more likely to negotiate.

Kevin
Kevin

My mother-in-law is retired and does not make enough to file taxes but owes $50k on a parent loan; every year she files for IBR and ends up with a $0 monthly payment and this will continue until the loan is forgiven or she passes. My wife and I are wondering if we would be able to negotiate a one time lump sum payment to settle the debt on her behalf. Do you think they would be willing to negotiate in this circumstance?

The Student Loan Sherpa
Reply to  Kevin

What you are proposing definitely makes sense. Taxpayers would be better off because the government would get some money upfront, rather than collecting nothing but paperwork for future years.

Unfortunately, that level of logic is rarely found in federal student loan servicing. You can certainly try as you are making a very reasonable offer, but I suspect you will have to continue on with your current strategy.

Dave007rock
Dave007rock

I’ve been paying a federal student loan since 2013. I owe 40K. I’ve paid 15K interest since they have owned the loan. I want to settle and is there a chance they would apply that 15K to principle and them take the 25K as lump some??? Keep in mind I am not in default and have paid throughout the whole time with no late pmts.

The Student Loan Sherpa
Reply to  Dave007rock

I doubt it.

There is no harm in asking… the worst they can do is say no. However, there really isn’t much of an incentive for them to take the settlement you are proposing.

Leah T
Leah T

Hi, thank you for this article. I have a a private student loan that is now owned by Navient. Repayment was to begin in 2006. Since then, I’ve been able to make minimal payments, and have been in default many years with occasional forbearances. As you can imagine, my credit has already been impacted by this negatively. I’ve been offered a settlement. If I took this settlement, would my credit take further hits/damage? Or, in a situation like mine, does the settlement seem like the best approach? Current due: $65,000+ I appreciate your reply.

The Student Loan Sherpa
Reply to  Leah T

Hi Leah,

A debt settlement can definitely hurt your credit report. Here is the explanation of how it works and how long it lasts from credit bureau Experian: https://www.experian.com/blogs/ask-experian/will-settling-a-debt-affect-my-score/

That being said, you only have the negative consequences if the lender reports that it was settled for less than the full amount. You might try asking about their reporting policy and what options that you have.

Good luck to you!

Melissa Ziemer Ryks
Melissa Ziemer Ryks

I have a $14,000 student loan through Navient that I have been paying on since 1997, now having paid over $32,000 due to 9% interest and “life happening” …medical, financial, etc. They still want another $12,000 from me if I were to pay this off today. What are your thoughts on trying to arrange a settlement for half and how might I go about it? I’ve attempted to contact Navient, but they wont put one thru to the credit management department.

The Student Loan Sherpa

That is a really tough situation.

Navient knows that they have you on the hook for the debt, and if they think you will eventually be able to pay it off, getting a settlement will be difficult.

Is this a situation where you feel like you have paid enough and the fair thing for them to do would be to settle the remaining debt? Or do you think they have misled you in some way or done something illegal?

A couple options would be to file a complaint with the CFPB: https://studentloansherpa.com/file-compliant-student-loan-company/ or to find a local attorney to possibly represent you.

To get the best outcome, I’d encourage you to consider a justification for paying half of the remaining debt. While you have certainly paid your fair share, saying “I’ve paid enough and I think I should be done” is unlikely to be a successful strategy.

Sandra
Sandra

Thank you for this. I will finish graduate school this December (2020). I have unsubsidized federal loans totaling $44k. I would like to pay this off sometime next year. By then I might have $30k in my savings based on my new job. Would it be possible to try to negotiate a payment of the balance in full for $30k? Is there a smart way to go about using my savings to get rid of this debt?

The Student Loan Sherpa
Reply to  Sandra

I would say it is highly unlikely that you are able to settle the debt via partial payment right out of school.

Attacking debt aggressively is a smart strategy because you will spend far less in interest over the life of the loan. You can read more about aggressive repayment here: https://studentloansherpa.com/pay-student-loans-quickly/

However, one thing to keep in mind is that you will want to set aside at least a portion of your savings to have in case of a financial emergency. This article has a breakdown on how to balance your student loan repayment goals with an emergency fund: https://studentloansherpa.com/student-loans-emergency-fund/

john
john

I am 70 years old, retired, income is combination of Social Security and ERISA retirements. I do not work, but would like the option, when I return from mostly living overseas. I have $170,000 in consolidated Parent Plus loans, on ICR, and making $835/month payments. Which does not even cover the growing interest. I have paid in about $26,000 to date. I pass the chapter 7 test on median income, because social security is not included at that point. But when total income is calculated, and total expenses, I am not near poverty. I have no other debts. I have no house, no car. It appears my options are continue paying or default and let them collect $270/month social security. Do you think they would consider a $30,000 cash settlement.

The Student Loan Sherpa
Reply to  john

Can I ask what your AGI is? The $835 a month is really high for someone living on social security. This tool might be useful for checking the accuracy of your current repayment plan: https://studentaid.gov/loan-simulator/

As for a cash settlement, I think it is unlikely. It doesn’t hurt to ask, but for a borrower who is current on their debt, a settlement is a long shot.

john
john

My AGI is about 64K. I have Social Security, Military retirement, and a private company retirement. The payment now is $735 for Student Loans, but a deduction falls away this year, so it will likely go up to about $835 next year. I am on the Income contingent payment, which I think is 20% of disposable income. And again, that is not even close to paying the interest. Total owed just goes up. At some point, I will decide not to work again, and do not see anything they can garnish except social security.

The Student Loan Sherpa
Reply to  john

Based upon your AGI it doesn’t sound like there is a calculation issue like I first suspected.

As far as garnishments, the rules do vary from state to state, so you might want to speak with a local attorney who specializes in collections. One thing they can also garnish is your tax refund, so be aware of that.

I’d also keep a close eye on the results of the 2020 election. Biden’s student loan plan calls for payments based upon 5% of discretionary income, meaning your payments would drop to around $200 per month. Obviously, there are a ton of variables at play, but it may alter your strategy.

Sheri
Sheri

Can i ask for a lower pay off amount if i just want to be done with it but dont have the full amount? Whats the best way to pay it for my credit?Loan has been in default a couple times over 24 yrs.

The Student Loan Sherpa
Reply to  Sheri

You can always ask, but lenders will rarely agree to it for the reasons described in the article.

Settling the debt could potentially hurt your credit, I responded to a similar question here: http://disq.us/p/2a5wgzd