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How student loan debt relief companies work
Why they can be helpful — unless you have federal loans.
Student loan debt relief can be a useful way to avoid defaulting on your student loans when you’re at risk. But it won’t be much help with federal loans. And you’ll want to make sure you’re working with a legit company — there’s been a recent government crackdown on student loan debt relief scams.
What is student loan debt relief?
Student loan debt relief is a solution for private student loan borrowers who are facing default. It involves working with a company to reduce your student loan repayments, get more favorable rates and terms or develop a strategy to tackle your large debt load.
Typically, you need to have at least $5,000 to $7,500 in student debt to qualify for more involved debt relief services like debt settlement. Federal loans generally aren’t eligible for debt relief with a private company, though you might be able to negotiate with the Department of Education (DoE) yourself.
Our top pick: Freedom Debt Relief
Our top pick: Freedom Debt Relief
What services are available for student loan debt relief?
The following services are available for student loan debt relief:
- Debt settlement. A debt relief company negotiates with your creditors to reduce the amount you owe in exchange for a one-time repayment.
- Debt management. A credit counseling agency or debt relief company negotiates with your creditors for more favorable repayment terms or reduced interest to help you avoid default.
- Credit counseling. A credit counseling agency works with you to manage your finances and come up with a plan to get out of debt. Credit counseling is required before filing for some types of bankruptcy.
Not all debt relief services work with student loans.
Check the company’s website or contact customer service to make sure it accepts student loan debt before you sign up.
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How does student loan debt relief work?
It depends on what type of debt relief you’re interested in. You can sign up for credit counseling at any time if you’re struggling with your personal finances. With debt management or settlement, borrowers typically sign up after they’ve defaulted on their loans, but before the loans have gone to collections — when lenders are most willing to negotiate.
Hiring a debt relief company typically involves filling out a quick online form with information about yourself and your debt. You’ll then meet with a debt relief consultant to discuss your situation and find a program that meets your needs.
Once signed up, we recommend applying for deferment or forbearance if possible while the company negotiates with your lender. This way, you won’t fall further behind on repayments and risk having your debt sent to collections.
With debt settlement, borrowers usually make payments into a third-party bank account during negotiations. The debt relief company then uses those funds to pay the negotiated-down balance to your creditor. With debt management, you make one monthly payment to the debt relief company, which then makes payments to your creditors on your behalf.
How much does it cost?
It depends on the type of debt relief program you’re enrolled in. Credit counseling can be free or cost you around $25 per course — you can find a government-approved credit counseling agency on the Justice Department’s website.
Debt management companies typically charge a monthly service fee of $100 to $200 that’s tacked on to your payment each month. Debt settlement companies typically charge a fee of 15% to 25% of the student debt you enroll in the program.
How long does it take?
It can vary depending on the type of debt relief you have. Credit counseling might only take a few hours. Debt management and debt settlement can take between two and four years, though it depends on your program.
How much could I save?
You might not save much right away with credit counseling, though you could save in the long run with the new strategies you learn from the session.
With debt management, it varies depending on the new rates and terms the company negotiates for you. Debt settlement can often lower your student debt load anywhere from 30% to 80% of what you originally owed. This amount doesn’t consider the 15% to 25% fee, though, making your savings actually closer to between 5% and 65%.
Can I settle federal student loans with a debt relief company?
No, federal student loans aren’t eligible for debt relief. The Federal Student Aid branch of the DoE warns that any company charging money for help getting or paying off federal student loans is acting illegally and likely a scam.
If you need help with your federal loans, contact your servicer. If your servicer is unresponsive or unhelpful — several have faced lawsuits over mishandling student loan repayments — you can also file a complaint with the Consumer Financial Protection Bureau (CFPB) as well as the Federal Student Aid Ombudsman.
How a student loan ombudsman can help resolve issues with your servicer
What are the benefits of using a student loan debt relief company?
Here are a few reasons why you might want to consider signing up for a student loan debt relief program:
- Avoid collections. Getting on track to pay off your loans can help you avoid hearing from collection agencies or being sued by your lender.
- Get out of debt quicker. Settling your debt or negotiating a shorter term at a lower rate could save you years of student loan repayments.
- Lower your repayments. With debt management, you can negotiate a longer repayment term — which translates into repayments you can afford.
- Potentially rebuild your credit. Debt relief can give you the chance to wipe the slate clean and up your credit rating if you’re able to complete the program.
What to watch out for
Signing up for debt relief carries some risk. Consider these potential drawbacks before moving forward:
- Student loan debt relief scams. The Consumer Financial Protection Bureau (CFPB) has recently cracked down on a number of scams involving student loan debt relief. Make sure you’re working with a company you trust before signing up.
- Potentially lead to bankruptcy. If you’re unable to complete the program, you might have to file for bankruptcy — though your student loans might not even be discharged if you file for Chapter 11.
- Less savings than expected. When debt settlement companies quote how much you can expect to save, customers often don’t consider the student loan interest that continues to add up and the fee for the service, which can get pricey.
- Tax implications. You’ll have to pay income tax on any debt that’s negotiated down by a debt relief company, reducing your savings to even less than you might have expected.
Are student loan debt relief companies a scam?
Not all are. There are some legit companies out there that offer debt relief to private student loan holders that are struggling with repayments. However, there are several scams that the federal government warns against. Some popular red flags include:
- Upfront fees for settlement. Debt settlement companies can’t charge fees until after they’ve delivered on their services.
- Fees for help with federal loans. Your federal student loan servicer should be able to provide all the help you need for free.
- Guarantees. Legit companies can never promise forgiveness or debt relief up front.
You can make sure your student loan debt relief company is legit by verifying information, such as the business’s address and website. Reading customer reviews on sites that verify users like Trustpilot can also give you an idea of what to expect.
Think you’re a victim of a debt relief scam? You can file a complaint with the CFPB, Better Business Bureau (BBB) and the Federal Trade Commission. Check out our article on student loan scams to learn more about what to avoid.
Will student loan debt relief affect my credit?
Student loan debt relief can have both negative and positive effects on your credit. Credit counseling can improve your credit by giving you the tools you need to pay off your student loans on time.
Debt management and settlement can ultimately improve your credit by getting you out of default or giving you a repayment plan you can follow. But it could hurt your credit in the short term if you continue to miss repayments during the negotiation process.
And if you fail to complete the program, you could end up filing for bankruptcy, which can stay on your credit report for as long as 10 years.
4 tips to make student loan debt relief a smart move
Debt relief can be helpful as long as you sign up for the right program and take some precautions in advance:
- Start with credit counseling. If you’re late on repayments or think you might struggle with repayments in the future, credit counseling can help you avoid defaulting in the first place.
- Reach out to your servicer first. Your servicer should be the first place you go when you can’t afford your loan — it might be able to offer options that make debt relief unnecessary.
- Do your research. When you’ve exhausted all other choices, read customer reviews and look out for lawsuits against any debt relief company you’re considering to make sure it’s the real deal.
- Consider the total cost before signing up. That means interest that could potentially add up while you’re in the debt relief program, as well as fees and taxes.
6 alternatives to get out of student loan debt
You have other options from debt relief if you’ve defaulted on your student loans — or are about to. Debt relief might not be the right one, especially if you have federal loans. Consider all alternatives first before signing up for a debt relief program.
1. Change your repayment plan
If you’re late on repayments and don’t see a change in the future, talk to your servicer about changing your repayment plan.
Federal student loans comes with several repayment options including income-driven repayments and plans that increase over time. Private lenders typically don’t advertise alternatives, but might be flexible if you’re in danger of defaulting.
2. Apply for deferment or forbearance
When money is temporarily short — say you get laid off or decide to go back to school — you might qualify to put your student loan repayments on hold. Both federal and private lenders offer at least one of these two, though you have more options with federal loans.
While it’ll save you in the short term, your servicer adds all of the interest while your repayments are paused to your loan balance, making your loan even more expensive.
3. Look into forgiveness, cancellation or discharge programs
Depending on your career and personal situation, you might be able to qualify to have your student loans completely or partially dismissed. Healthcare professionals, lawyers, service members and public servants might want to take a particularly close look at this one.
While there are more programs open for federal loan holders, there are many loan repayment assistance programs (LRAPs) available for both, which can significantly reduce your student debt if you meet the eligibility criteria.
4. Sign up for federal student loan rehabilitation
Already defaulted on your federal loans? Debt relief generally isn’t an option, but you can get out of federal loan default by signing up for rehabilitation and making nine monthly repayments adjusted to fit your income. Reach out to your servicer to get started.
5. Consolidate your federal student loans
Applying for a federal Direct Consolidation Loan is another way to get a federal loan out of default. Consolidation involves taking out a new federal loan to pay off all of your current federal student loans together, potentially with a different servicer and repayment plan.
6. Refinance your federal and private student loans
If your repayments are up to date and you have strong credit, refinancing with a private student loan provider could give you the rates and terms you need. Just make sure you understand what benefits you stand to lose by refinancing your federal loans with a private company.
Can student loans be discharged during bankruptcy?
It’s possible to get your student loans discharged during bankruptcy, though not guaranteed. To do so, you must file for Chapter 7 or 13 and have the judge determine that your repayments cause “undue hardship” to you and your family.
As of February 2019, the DoE is revisiting its definition of “undue hardship” to make it easier to discharge your student loans during bankruptcy proceedings.
4 changes we might see to federal student loan legislation in 2019
Compare student loan refinancing options
Bottom line
Student loan debt relief is generally a last-resort option for private student loan holders who have already defaulted on their loans. With the exception of credit counseling, you likely need an alternative if you’re paying off federal loans or are technically just delinquent. If you decide to go this route, make sure the debt relief company is legit and that you understand all of the costs involved before signing up. Or check out these other resources for help with your student loans.
Learn more about how it all works with our guide to debt relief or our page on navigating student loans.
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