Negotiating a Settlement Amount on an Account in Good Standing

College students moving into college dorm
Dear Experian,

My mother offered to pay off my private student loans. The account is in good standing, but I am negotiating to pay an amount less than the total owed. If there is no negative payment history, but the account shows it was settled for less than the full amount, will this lower my credit score?


Dear MJS,

A settlement on your account will have a negative impact on your credit scores—even if there were no previous late payments—because you didn't pay the debt in full, as agreed. Failure to pay the debt in full will always be seen as a sign of risk to future lenders.

What Does It Mean to Settle an Account?

When a lender agrees to settle an account, it is agreeing to take a financial loss by accepting less than the full amount that is owed to close out the account. This is considered negative because you did not honor the original contract and pay the debt in full as agreed.

How Will a Settled Account Affect My Credit?

It's generous of your mother to offer to pay off your loans. However, if she doesn't pay back the full amount you owe, the status of "settled" on your account will reflect negatively on your credit history—even if you have always made all your payments on time. A settled account that was never late will remain on your credit report for seven years from the date it was paid in settlement.

Keep in mind that student loans often report separate accounts for each semester you attended school, even if you only make one monthly payment. If you have multiple loans appearing as settled on your credit report, the impact on scores may be even greater.

Contact Your Lender if You Are Struggling to Make Payments

If you are having trouble making payments on your student loans, consider discussing payment options with your lender. While it may seem easier to simply agree on a settlement offer, your lender may be willing to work with you to develop a plan to continue making on-time payments. This can help you continue to build a strong credit history—and avoid the hit to your credit score a settlement will cause.

If possible, consider using the money your mother planned to give you to pay down the debt instead. You may then be able to refinance the remaining balance so that your monthly payments will be lower. Some student loans may have even more options available to manage repayment. Ask your student loan servicer about alternatives to settling the debt. While settling your student loans is better than not paying them at all, doing so will almost certainly hurt your credit.

Having a positive credit history is essential to your future—for everything from obtaining a cellphone or a car loan to qualifying for an apartment or a mortgage. By making all your payments on time thus far, you have already begun establishing a strong credit history for yourself. If you can maintain that good payment history, it can save you thousands of dollars in high interest fees down the road.

Thanks for asking.
Jennifer White, Consumer Education Specialist