Settling student loan debt: tough, but possible

Dear Liz: I currently have a consolidated student loan with the federal Direct Loan program at an 8.25% fixed rate. I initially borrowed $50,000 18 years ago, but the balance due has ballooned to almost $155,000 over the years.

I have annually applied for and been granted a forbearance from Direct Loans so my account is currently in good standing. I’ve recently had some good fortune and will be coming into a substantial amount of money that would allow me to pay off the entire balance due in one payment.

Given the circumstances, is it possible for me to approach Direct Loans with the possibility of paying off the entire balance due at a reduced rate since I’m willing to pay it all up front? For instance, I could offer them $100,000 if they’ll forgive the remaining balance of $55,000.

Answer: In most cases, the U.S. Department of Education won’t negotiate with borrowers over the amount they owe on federal student loans, said student loan expert Mark Kantrowitz of FinAid.org.

That’s because the department has extraordinary powers to force you to pay. The debt can’t be discharged in bankruptcy and the department can intercept tax refunds, garnish your wages and take a portion of many government benefits, including Social Security checks, if you default.

There also is no statute of limitations on student loan debt, which means there’s no time limit on how long the government can take to sue borrowers who default. The feds can wait for years until borrowers’ circumstances improve and then go after them.

Given its arsenal, the government can take a tough stance, Kantrowitz said. But he has heard that the department sometimes will agree to forgive a portion of accrued interest and fees if the remaining balance will be paid off in full.

What you need to find out is how much the Direct Loan program paid for your loan, Kantrowitz said, since the government will never accept less than what it cost to acquire a loan.

You’ll need to use the National Student Loan Data system ( www.finaid.org/loans /lostlender.phtml) or your own records to determine what your balance was when you consolidated your loans into the Direct Loan program. That is the amount the department paid to acquire the loans from your original lender.

Kantrowitz recommends offering to split the difference between that figure and your current balance. Whatever the department counteroffers, accept it.

“That’s a reasonable approach that is fair to both the borrower and the taxpayers,” Kantrowitz said, “providing the taxpayers with some compensation for the cost of the funds over the years.”

Don’t spend the rest of your windfall, however. If the government does forgive a portion of the debt, the amount forgiven is considered taxable income to you.