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

Negotiating a student loan payoff usually isn’t possible except for a couple very limited situations.

Written By: Michael P. Lux, Esq.

Last Updated:

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

Negotiating a student loan payoff usually isn’t possible except for a couple very limited situations.

Written By: Michael P. Lux, Esq.

Last Updated:

Affiliate Disclosure and Integrity Pledge

The Situation: You are able to make a large, lump-sum payment to pay off most or all of your student loan balance. You want to know if it is possible to negotiate a discount on this final payoff. Those worried that a large payment might be a mistake should read this article.

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 to obtain 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 presently 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.

The collecting of principle is how lenders retrieve the money they gave you. The collecting of interest is how lenders make money. 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. A lender accepting a large partial payment rather than the full balance just doesn’t make good business sense from their perspective. Furthermore, because they make money on interest and fees, not collecting any more interest or fees isn’t a win for them, either. This is why negotiating a lower interest rate is usually easier than arranging for a loan payoff.

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. But, even if it doesn’t seem like a win, it is still a big deal 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, however, is that the borrower in question was way behind on their loans and severely in default. The negotiation normally takes place between the borrower/borrower’s attorney and a collection agency.

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 they negotiate a lower payment?

Beating the System: Using a lump sum payoff to eliminate a student loan

There is definitely the temptation to try to get clever. Instead of making payments on your loans, you save the money. As time passes, you amass a huge settlement amount while your lender starts 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 a credit score may be just a number, it can have a significant impact on your financial plans. For example, it can mean the difference between owning a house versus renting. It also dictates the interest rate of any loans that you may acquire. A good credit score has real financial value. 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, 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 with.

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. A partial payoff may not be your ideal solution, but it’s much better than 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 big step forward.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

53 thoughts on “Fact or Fiction: Can I payoff my student loans with a lump sum?”

  1. I’m afraid that if I even ask about it, I’ll get hit with a pay-in-full lien. I’ve been on the Income-Dependent repayment for a long time, but even prior to that it was in default sometimes, and almost always late. In other words, most of the loan now is interest. If I make an offer of pennies-on-the-dollar, will the feds renege on the IDR? Or would I be better off just paying on this forever?

  2. I started with about $136,000 in federal student loans (partly due to cancer in grad school), got it paid down to about $87,000. Got several more cancers and have a hardship deferment (well covid one now but it was in hardship deferment prior to covid). Can’t find another job due to age and the gap in my vitae. Currently, due to some capitalized interest (all Stafford loans some subsidized, some not), I owe about $97,000. I’d do bankruptcy with an advesarial proceeding but I live in the 5th federal circuit court and that Dallas judge’s ruling in, I beleive it was, 2018 has made it essentially impossible to do that (no attorney will take the case because of that). I’d more than qualify under Brunner’s. Clearly moving to AR (totality of circumstances) and then file would help but I need to be in hud (paying $25/mo) and the waiting lists are long. A friend offered to help with a lump sum if that would get this money off my back. In circumstances like this is the Dept of Ed more likely to do a discretionary settlement, like one about 1/3rd of the total owed? Or am I basically sunk for life unless I move so I can file the adversarial proceeding? Oh I have precious little other debt since I don’t spend money I don’t have and I can’t include medical debt as I can’t afford care to be cut off. As a result I don’t even know if I’d be allowed to file since it would essentially be for school loans. Thanks.

    • It sounds like you have really done your homework on this one.

      The one option that I didn’t see you mention was chasing after forgiveness. With your current employment status, your monthly payments would be $0 on all of the IDR plans (I’d suggest REPAYE for you due to the interest subsidy.) Going this route, your loans would eventually be forgiven, it would just take a while and require yearly paperwork.

      • Thanks for your suggestion. The thing I worry about is that what is forgiven is taxable. While I see that only 50% of the interest will be capitalized (which I didn’t know so you are right this is a better option than most), eventually I’ll hit a much higher amount due. I am not positive I’d be considered totally insolvent since they count anything in retirement accounts along with your first born. I really worry about that. I have read that many circuits don’t count against you not doing these kinds of repayment plans since you are just substituting one debt for another and that ‘other’ isn’t forgivable under any circumstance unless you are insolent.

        Also they reset the count on the number of years you are paying so I’d owe 25 more (all grad school debt) which would carry me well into retirement and thus risk I’d not to be able to afford medicare gap insurance. If one ever lets that drop you have to pass medical underwriting to get it back. I’d fail due to 3 cancers. I’d never be able to afford paying an unlimited 20% of costs plus whatever the deductible is for each hospitalization. That would be a death sentence. Of course that would solve the problem, just not in an optimal way LOL.

        Is there any way to see if anyone in the federal 5th circuit has been successful with bankruptcy since that Dallas’s judge’s ruling? Anything I have searched on I haven’t been able to find any easy way to find this out (I live in MS so I was looking at MS judges that do the cases for Jackson). If even one person has been successful I’d try it without an attorney provided having almost exclusively student debt is allowed to even declare bankruptcy (which is something else I haven’t been able to find out). All MS attorneys I have talked with will not help with bankruptcy with an adversarial proceeding.

        Thanks again for answering my questions.

      • Thanks. I am on a fixed amount a month plan for approximately a billion years and I chose that because I wanted to be able to channel more into retirement. At that time with an income one I would have been be paying far more a month). At one point I was told if I moved to any of the income dependent ones I’d have to reset. I’ll check that to see if that is still true.

        I sure hope the tax bomb goes away for more than the limited time Biden’s administration as authorized.

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