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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.

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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.

Savvy 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 accept the loan as being paid in full?

It’s true that debt settlements, when debts are settled for less than what’s owed, do happen. However, this practice is more common for medical debt than it is for student loans. Probably the biggest reason for this is that bankruptcy is much more difficult to obtain for student loans. Lenders know that borrowers have little choice but to pay back the debt in full.

That being said, there are limited circumstances in which a lump sum payoff can work.

A Student Loan Partial Payoff Example

Suppose you have $30,000 in student debt to be paid off over the next 25 years. If you suddenly had an extra $22,000, you may wonder if your student loan lender would be willing to take the cash up front and call it even. In some ways, the transaction makes sense for both parties. You pay way more than the amount that is currently due, but you save money over the life of the loan. The lender receives a significant payment much earlier than they expected.

Win-win, right?

Let’s Make a Deal Doesn’t Work

The idea of settling your student debt with a lump sum payment seems practical from a borrower’s perspective. This approach runs counter to how lenders generally operate, though. The exact amount of money a lender currently receives from the borrower is not the lender’s biggest concern. Instead, lenders are primarily focused on the long-term return they can generate from a loan.

Collecting principal is how lenders recoup the money they lent you. Collecting interest is how lenders make money. 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. 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. This is why negotiating a lower interest rate is usually easier than arranging for a loan payoff.

If you approach your lender with a proposal to settle, you are unlikely to succeed in significantly reducing the debt outright. The most feasible action is often just to pay off the existing balance in full. While this may not feel like a victory, paying off your loan early is still beneficial for you as it prevents additional interest from accruing, potentially saving you money in the long run.

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. A key detail that is often omitted from these stories, however, is that the borrower in question is usually delinquent on their loans and deep in default when these settlements occur. The negotiation normally takes place between the borrower or their attorney and a collection agency rather than the original lender.

In such scenarios, lenders may be more open to negotiation because they face a real risk of not recovering any money at all. Faced with the choice of receiving a definite amount now or potentially nothing later, they often choose the immediate payment.

For borrowers who are up to date on their loan payments, the situation is different. Lenders see these borrowers as low-risk, expecting to recover the full amount over time. Therefore, they have little incentive to settle for less.

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

There is definitely the temptation to try to get clever. The idea of deliberately delaying student loan payments to save up a large settlement amount can seem appealing at first glance. This strategy involves letting the loan go into default, then offering a lump sum when the lender becomes eager to settle as they approach potential legal action.

However, this approach is fraught with substantial risks and can end up being much more costly than it appears.

One of the immediate consequences of not making loan payments is the damage to 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.

Another critical issue is the accumulation of debt. When you stop making payments, interest on your student loans continues to accrue, increasing the total amount you owe. Late fees add up with each missed payment, further inflating your debt. By the time you propose a settlement, the total debt could be significantly higher than the original amount due to these added costs.

Thus, while it might be tempting to try to manipulate the system by saving up for a lump-sum settlement, the potential long-term costs, including a ruined credit score and a much larger debt burden, make this strategy highly risky. It’s generally safer and more financially prudent to maintain regular loan payments and explore other repayment or forgiveness options that don’t jeopardize your financial health.

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

While it might be tempting to look for a loophole or quick fix to eliminate your student loan debt with a large sum of money, such strategies rarely exist.

If you have a substantial amount of money available and are considering using it to reduce your student loan debt, send in the big check. This won’t clear your debt entirely, but it will significantly reduce the principal amount owed. Lowering the principal means you’ll accrue less interest daily, which can save you a substantial amount in the long run. A partial payoff may not be the perfect solution, but it’s far more beneficial than sticking to 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.

Ultimately, 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.

  3. Great read. I have a 26k 15+ yr private institutional loan. I have defaulted and SOL has passed. I cannot get my transcripts/diploma/or Alumni benefits as they are holding all over my head. The promissory note only mentioned diploma/transcripts so i feel as if they are changing the terms. Is there any hope and/or attorneys willing to help me settle for a lesser amount?

    • I hate that schools do this. Awful, awful policy. If people need their transcripts to get a job, why would you block that? How does standing in the way of employment make sense as a strategy to get paid? Its wrong on so many levels. (However, if you are in California, there is a new law that just went into effect prohibiting the school from doing it)

      Anyway, help from an attorney could be a good idea, especially if the SOL has passed. You should look for local attorneys that specialize in representing consumers in debt collection cases.

  4. I have multiple private loans through navient. I have one loan that was co sighned and i was able to keep up with. I have the money to pay off in full for 3,000 because of some help by family members but the other ones are in default due to financial issues at the time and the lender not wanting to work with me. I am afraid if i pay this off in full they will think i have money to pay the rest. What do you think?

      • That they will think i have enough money to pay those off as well and come after me for the other loans. I have no plan as of right now. Like i said everytime i would call and ask for assistance in the past they would do a new calculation and it would be higher at one point i was making less money and they just would not budge and they would say just put it on a credit card which i thought was a very stupid thing to say. But i am at a loss with them regarding the other loans.

      • Hi Hailey,

        Before I jump into my thoughts on this issue, let me start by telling you what I don’t know. I don’t want you to make any decisions thinking you have all the information when all I’m able to provide is part of the picture. Here is what I don’t know. I don’t know the collection laws in your state (they are different in every state). Because I don’t know the collection laws in your state, I don’t know how paying off one loan could impact your rights with the other loans. This would be a subject to discuss with a local attorney.

        I’m bothered by the fact that they are suggesting you make payments with a credit card. I’m glad you thought it was a stupid thing to say. You might be able to make some progress by talking to someone else within Navient. This article should help you find the right person to talk to.

        Have you looked into the rate reduction program with them? I’ve gotten mixed reports from people who reached out to Navient asking to get a lower interest rate and lower payments so that they could catch up on their loans. I think you might have some luck going that route. This article explains the rate reduction program.

  5. My husband owes $47k principal and $3k interest on his federal student loans. On top of that, his statement includes another $12k in “fees”?!?!

    He’s been in default for a LONG time and the only payments for at least the last 5 years have been through wage garnishment of his paycheck and the IRS confiscating our joint tax refunds. I’m planning to do a cash out refinance on my house to pay off his debt and use the rest of the cash out for other goals. I want to know the best way to “negotiate” a settlement amount and ensure they don’t screw us over somehow (beyond the very obvious screwing over the last 20 years). Any suggestions on how I should phrase my request for a reduced payoff that constitutes payment in full? Any documents I should specifically ask for? Any expectations I should have on how low we could get the payoff amount? I certainly appreciate any and all help!

    • This will be a challenge, but given the high fees that have been charged, you may be able to negotiate a lower payment.

      One tip: make sure you are talking to someone with the authority to settle the debt. Most customer service representatives do not have the ability to accept anything less than full payment.

  6. 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.

  7. 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.

      • 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.

      • 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.

  8. 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?

  9. 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.

    • 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.

  10. 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.

  11. 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.

  12. 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?

    • 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.

  13. 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?

  14. 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?

    • 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.

  15. 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?

  16. 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!

    • $8,000 in student loans LOL. Mary, that is chump change; people on this site routinely have $50,000 even $100,000+ in student debt. I WISH I only had 8K in loans…

  17. 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?

    • 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.

  18. 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?

    • 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.

  19. 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?


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