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It may be possible to settle your federal student loan with a lump sum payment which is less than the full balance. The Department of Education published the criteria back in 2009 in a PCA (Private Collection Agency) guidance report and refers to it as a “reduced overall payment”.
A settlement will not be the first option offered to you. Your ability to pay will have been evaluated as the other options are first reviewed. The time period over which this occurs may be uncertain.
There are three types of settlements or “compromises”:
If you agree to a settlement, the Private Collection Agency would send to you a letter and document the request/agreement and would then contact you to complete the agreement with a payment.
Believe it or not, the compromise guidelines state that a credit card could be used to make the payment and other forms of payment include money order, cashier’s check, or certified (personal) check.
If the settlement is approved, it will only be good for a period of 90 days. However, an exception of this rule can be requested internally at the Department of Education through their Atlanta office. If you’ve been issued a legal judgement on your federal loans it may be more difficult to settle them. The guidelines suggest that settlement in this case may only occur in order to rehabilitate other outstanding federal loans. Because you may have received more than one disbursement of a federal student loan, you may have multiple outstanding loans and if they have not been paid for approximately 9 months (in most cases) then they will have gone into default. When there is more than one loan, one or more may have gone into default while others haven’t reached the 9 month threshhold, for example.
The private collection agency loses a commission when they set up the settlement incorrectly.
Standard settlement means one of three things:
1) You pay 90% of the principal and interest
2) You pay all the principal but only half of the outstanding interest, or
3) You pay all interest and principal (and the collection fees are potentially waived)
A discretionary compromise means you would pay less than the standard settlement (compromise) amount. A determination of financial hardship is made in these cases.
Non-standard compromises appear to be more of an administrative gift to private collection agencies for deals they make which are not standard and not-pre approved by the Department of Education.