Private Student Loan

I am really stressed out!!!! I had a private student loan with citibank for 9500.00, i defaulted and have paid a total of approximately 8500.00 to a collection agency called LCS financial services . They are now telling me I owe 7000.00 still in interest and fees. I tried to settle with them back in march for 3900.00 but had a financial medical emergency and had to use the money, so i was unable to pay them. I have made $550 total in payments for March April May because of financial hardships due to the medical emergency. They are telling me the offer is off the table and I need to make a $1000 deposit and $500 a month to pay off this debt. They are threatening me and my co-signer and i am not sure what to do. Can they do this and if i need to offer a settlement amount what is a good number. They said that they will take it to the insurance company that paid citibank off and see if they want to take legal action!!!!