Federal Student Loan Settlement | 5 Reasons I Don’t Recommend It

Federal student loan settlements are something that many people seek to fall back on when they are having a hard time paying back their student loans. Many people do this as they believe it will fully take away their problem and that they will be left with no more issues at the end. 

The truth about this is that it leaves you with many problems, and there are many reasons that you shouldn’t turn to a federal student loan settlement as a solution! While many options are available for settlements, a settlement isn’t the only option and you should not rely on one as being your last option.

5 Reasons I Do Not Recommend A Federal Student Loan Settlement

Many professional lawyers and law firms, such as Galler Law, also suggest how you should not settle your federal student loans. It comes with many issues that some people do not think about ahead of time. Five reasons that I do not recommend federal student loan settlements include:

With these five reasons in mind, many people will understand why a federal student loan settlement may not be the best idea for you. While they may work for some people, they do not leave people problem-free whatsoever. If you are thinking about settling your federal student loan, it may be a good idea to continue reading on reasons why you shouldn’t.

You May Have To Pay Taxes On the Amount Cancelled

One financial aspect of federal student loan settlements that many people do not think about is that they will likely have to pay taxes on the amount of the loan that was canceled! Generally, when you are getting a settlement for your student loan debt, the amount of canceled debt is taxable. This has many downfalls that come along with it, including:

  • You May End Up Paying More Than Planned
  • You Have To Find A Way To Get Even More Money
  • The Original Plan May Not Sound As Good As You Thought

That is correct, the amount of debt that was canceled through settling a loan usually requires you to pay for the taxes on that amount of debt that you don’t pay. This means that for the year the cancelation occurs, you have to report that debt that was canceled as income on your tax return. For example, if you only end up paying $60,000 of a $90,000 student loan, you will still have to pay taxes on the reported $30,000 you aren’t paying. This means you are still paying more than you may have originally thought unless you qualify for an exception.

You Lose The Ability To Invest Money

As we all know, you can use your money to make more money! You can do this through investment, which is something many people do as it is a reliable method of getting extra money to save up. If you end up paying a settlement for your student loans, you may lose this opportunity for a long time. The downfalls that come with this include:

  • Having Less Money To Use To Invest
  • Saving And Receiving Less Money In The Long-Run
  • Missing Out On Investment And Financial Opportunities

Since you are going to be paying a lot of money for your student loan debt, you will not be able to use that saved money to invest. Investments may not only be for money itself, but can also be for physical assets that you can purchase or own. These things can also give you a high return at some point in the future, making you even more money. By using so much of your saved cash on a settlement, you will likely lose this opportunity for a long time.

Unable To Provide For A Financial Emergency

If you choose to pay a settlement for your federal student loans, you are likely to use money that you have put away for emergencies or savings. By using this money that you have put away, you are hurting your financial security by not having the money there for emergencies when needed. If yourself or your family is ever facing an emergency, such as a life-threatening situation, that money can come to good use in times that are least expected. Instead of blowing all of this money with one decision, make a smarter decision instead of going for a federal student loan settlement.

There Are Better Options Than A Settlement

Many people personally believe that a student loan settlement is strictly their last and only option. This is untrue and people need to look into more options before coming to such a quick decision. By choosing to get back on track financially through smart decisions, you can save yourself from ruining so many financial aspects of your life. You can receive help if you ask for it.

Instead of relying on a student loan settlement, you can get your loan out of default or completely restore your loan to good standing once again. This can save you from many negative things, such as a bad credit score, enforced collections, and a major financial loss. You will be able to find a repayment plan for your federal student loan that works for you. Many plan options are helpful and based on your income, family size, disability, and many other living situations. Over time, you can get back on track and pay your student loans off properly and safely.

You’ll Be In A Worse Financial Situation Overall

As a whole, you will be in a worse overall financial situation if you end up choosing to choose the route of paying for a federal student loan settlement. Not only can you severely affect your current financial status, but you will hurt your financial status in the long run in many ways. Rather than trying to get back on track with your student loan payments, a settlement can negatively affect you in many ways, including:

  • Ruining Your Credit Score Severely
  • Missing Out On Investment Opportunities
  • Losing The Ability To Purchase A House Or Vehicle
  • Not Being Able To Get Another Loan For A While

While these are just a few reasons, there are also many other reasons on how a federal student loan settlement can hurt you financially. Overall, it is never a good idea to settle your federal student loans.