How to Handle a Student Loan Lawsuit

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Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.

Editorial Note: This content is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by the financial institution.

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Student debt continues to be a growing problem in the United States. A recent Student Loan Hero analysis found that graduates in 2019 left college with an average of $29,900 in debt, a 2% increase from 2018. While millions of borrowers are burdened by hefty payments, not paying student loans can lead to even messier problems.

What happens if you don’t pay your student loans can depend on several factors, like how long you skip payments, whether your loans are private or federal and the statute of limitations on student loans in your state. In some situations, you may even find yourself facing a student loan lawsuit.

Here’s what you need to know about…

Federal vs. private student loan lawsuits
What to do if you’re being sued for student loans
What happens after a judgment is entered against you?
Bottom line: Be proactive

Federal vs. private student loan lawsuits

Whether or not you get sued for your student loans will depend on whether your loans are federal or private.

Federal

Since the government has several options to force you to repay, including wage garnishment or withholding tax refunds, it is uncommon for borrowers to see a lawsuit from missed federal loan payments. When you miss a payment on your federal loans, it is immediately considered delinquent. However, federal loans will not enter default for 270 days. At that point, the entire balance of the loan will be due, and that’s when you may start to see the funds disappear from your paycheck.

If you miss a payment because you cannot afford it, talk to your loan servicer as soon as possible to discuss pausing or lowering your monthly payment. It’s better to see what options you might have than letting the problem get worse.

Private

Private lenders, on the other hand, are far more likely to take you to court over a defaulted loan. While federal loans will not default until 270 days after the initial missed payment, private loans can be in default as soon as the first payment is missed (depending on the lender’s policy).

Even if you’re up to date on payments, there are other reasons your loan could go into default, including bankruptcy or the death of a cosigner. Once you default, you’re at risk of being sued by the lender or a collections agency. If they pursue legal action, you’ll receive a summons to appear in court.

What to do if you’re being sued for student loans

It can feel scary to face a lawsuit, especially if you’ve never faced one before. It’s important not to panic or ignore the severity of the situation. You can handle this.

Get organized

  • Mark the date and time of your summons: This is one of the most important steps. If you fail to act by this date, the judge may enter a default judgment against you, meaning you’ve already lost the battle.
  • Ask for verification of the debt: Contact the lender or collections agency to get the details of your debt and why it’s being collected now. The Consumer Financial Protection Bureau has sample letters you can use to make sure you’re covering all your bases.
  • Do your homework: Before you make a plan of action, make sure you have all the facts straight, including who is suing you and why. You should also look up your state’s statute of limitations, or the amount of time a lender has to sue you after you default. The statute of limitations on student loans is different depending on where you live, but it can range from three to 10 years.
  • Contact your cosigner: If the lawsuit is for a loan on which you have a cosigner, it is possible for your cosigner to be sued as well. You’ll want to contact them to see if you can work together to repay the loan.
  • Consider hiring a lawyer: While lawyers can be costly, their fees may be lower than what you end up having to pay on the loans, so keep hiring one in mind. There are also no-cost or low-cost options. Even if you just have a consultation with a lawyer, doing so can help you be better equipped to handle the lawsuit.

Try to settle your debt with your lender

You might be able to avoid a court date by settling with your lender before the lawsuit moves forward. Just make sure you contact the lender or the party suing you as soon as possible to avoid missing your court’s deadline.

In this case, student loan lawyer Jennifer Weil recommends taking a hard look at your finances and assessing what payments you are able to afford in the form of a lump sum or monthly payment. You’re trying to estimate what you can offer your lender.

For example, say you’re being sued for $30,000 and you happen to have $15,000 in a savings account. You can offer to pay your lender or collections agency the $15,000 to settle your debt and avoid further legal action. In the same way, you can offer to pay $200 per month for a set amount of time as an alternative settlement arrangement. All arrangements are subject to your approval the approval of the lender or collections agency, which is why it’s important to know who is suing you. Weil says in her experience, some creditors are much more willing to settle than others.

If you should enter negotiations with the plaintiff and your date is approaching, you can ask their attorney to request that the judge not enter a judgment against you. If they decline, you will need to file an answer to the suit.

File an answer or motion

If you cannot afford to settle or cannot reach an agreement with your lender or collections agency, you will need to respond to the court by the aforementioned date. At this point, you will either be filing a motion to dismiss or answer to the lawsuit.

Weil says dismissals are rarely granted because a lot of judges want to see all the facts before ruling. “The only way to do that is to go through the discovery process, which kicks in after the answer is filed,” she said. “The discovery process allows for an exchange of documents and other facts. Many judges prefer to make decisions based on the facts.”

Your answer to the lawsuit needs to address each of the complaints against you and your possible defenses. This can be a simple printed document where you address each allegation. Send your answers both to the court and to the plaintiff’s attorney.

Pick a defense

Unfortunately, there aren’t many solid defenses against a student loan lawsuit. If you did not take out the loans and are dealing with a fraud case, you should absolutely get a lawyer and take the suit to court. If the debt is yours, common defenses include:

  • The statute of limitations has expired
  • The company suing you can’t prove the debt or is unlicensed to do business in your state
  • The amount of debt owed is incorrect
  • You paid the total amount of the loan, but the lender or collections agency isn’t current on their records
  • You still have an outstanding balance on your loan, but you’re being sued for more than you owe
  • The loan has been canceled, or the school you were attending closed

What happens after a judgment is entered against you?

A judgment will be entered against you if you fail to respond to the lawsuit or lose the suit in court. This judgment means the plaintiff now has other options to settle your debt, like garnishing wages or putting a lien on your property.

Note that state law generally has exemptions to protect your home or other important assets from seizure, possibly including your car and any work tools. There are also rules about how much of your salary can be garnished. Consult with your attorney — or a pro-bono advisor willing to counsel you for free — so that you know your rights.

Suffering a judgment against you is not an ideal situation, but Weil points out the benefit of facing a lawsuit is that it forces you to address the situation. For better or worse, you should walk away from the experience with a plan to get rid of your student debt. It might not be the prettiest plan at this point, but it’s a plan nonetheless.

Is bankruptcy an option?

Regardless of whether you explore bankruptcy before or after you’re faced with a lawsuit, getting your student loans discharged in bankruptcy is notoriously difficult. While filing for bankruptcy before you’re sued would prevent legal action, it does not necessarily improve the likelihood of your loans being discharged. Regardless of when you file, make sure you have a clear understanding of the costs of declaring bankruptcy to make sure it is the best option for you.

Bottom line: Be proactive

The most obvious method you can use to avoid a student loan lawsuit is to stay on top of your payments. If you know you’re approaching a potential missed payment, take action.

If you just lost your job or are hit with a huge emergency expense, it’s always in your best interest to talk to your lender or collections agency first and see what can be done. Pausing your loan payments in deferment or forbearance is better than skipping payments and trying to catch up or to quit paying altogether.

As soon as you miss a payment on your student loans you put your credit score at risk, which can lead to even greater financial turmoil well before you ever see a lawsuit. If you find yourself in a situation where you cannot payback your student loans or your monthly payments are too high, explore your options for refinancing. With private loans, your options for getting out of repayment are incredibly limited. But staying in communication with your lender or collections agency can help you avoid additional problems.

This blog does not provide legal advice. If you need legal advice, please contact an attorney directly.

Paul Sisolak contributed to this report.

Interested in refinancing student loans?

Here are the top 6 lenders of 2020!
LenderVariable APREligible Degrees 
1.99% – 6.65%1Undergrad
& Graduate

Visit Laurel Road

1.99% – 7.10%2Undergrad
& Graduate

Visit Splash

2.99% – 6.44%3Undergrad
& Graduate

Visit SoFi

2.39% – 6.01%Undergrad
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Visit Elfi

1.99% – 6.43%4Undergrad
& Graduate

Visit Earnest

3.18% – 6.07%5Undergrad
& Graduate

Visit CommonBond

Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Laurel Road.

Laurel Road Disclosures

All credit products are subject to credit approval.

Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.

As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.

  1. Checking your rate with Laurel Road only requires a soft credit pull, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
  2. Savings vary based on rate and term of your existing and refinanced loan(s). Refinancing to a longer term may lower your monthly payments, but may also increase the total interest paid over the life of the loan. Refinancing to a shorter term may increase your monthly payments, but may lower the total interest paid over the life of the loan. Review your loan documentation for total cost of your refinanced loan.
  3. After loan disbursement, if a borrower documents a qualifying economic hardship, we may agree in our discretion to allow for full or partial forbearance of payments for one or more 3-month time periods (not to exceed 12 months in the aggregate during the term of your loan), provided that we receive acceptable documentation (including updating documentation) of the nature and expected duration of the borrower’s economic hardship. During any period of forbearance interest will continue to accrue. At the end of the forbearance period, any unpaid accrued interest will be capitalized and be added to the remaining principle amount of the loan.
  4. Automatic Payment (“AutoPay”) Discount: if the borrower chooses to make monthly payments automatically from a bank account, the interest rate will decrease by 0.25% and will increase back if the borrower stops making (or we stop accepting) monthly payments automatically from the borrower’s bank account. The 0.25% AutoPay discount will not reduce the monthly payment; instead, the discount is applied to the principal to help pay the loan down faster.

Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.

Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.

Interest Rate: A simple annual rate that is applied to an unpaid balance.

Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.

KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.

This information is current as of June 23, 2020. Information and rates are subject to change without notice.
 


2 Important Disclosures for Splash Financial.

Splash Financial Disclosures

Splash Financial loans are available through arrangements with lending partners. Your loan application will be submitted to the lending partner and be evaluated at their sole discretion. For loans where a credit union is the lender, or a purchaser of the loan, in order to refinance your loans, you will need to become a credit union member.

The Splash Student Loan Refinance Program is not offered or endorsed by any college or university. Neither Splash Financial nor the lending partner are affiliated with or endorse any college or university listed on this website.

You should review the benefits of your federal student loan; it may offer specific benefits that a private refinance/consolidation loan may not offer. If you work in the public sector, are in the military or taking advantage of a federal department of relief program, such as income based repayment or public service forgiveness, you may not want to refinance, as these benefits do not transfer to private refinance/consolidation loans.

Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of May 1, 2020.

Fixed APR: Annual Percentage Rate [APR] is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rate options range from 2.88% (without autopay) to 7.27% (without autopay) and will vary based on application terms, level of degree and presence of a co-signer. Rates are subject to change without notice. Fixed rate options without an autopay discount consist of a range from 2.88% per year to 6.21% per year for a 5-year term, 3.40% per year to 6.25% per year for a 7-year term, 3.45% to 5.08% for a 8-year term, 3.89% per year to 6.65% per year for a 10-year term, 4.18% per year to 5.11% per year for a 12-year term, 4.20% per year to 7.05% per year for a 15-year term, or 4.51% per year to 7.27% per year for a 20-year term, with no origination fees. The fixed interest rate will apply until the loan is paid in full (whether before or after default, and whether before or after the scheduled maturity date of the loan).
The Rate will not change during the term. Repayment examples are for illustrative purposes only. The following Fixed Rate examples are based on a $10,000 loan amount using the lowest APR for each application term listed above. All student loan rates used in calculating the examples are shown without the autopay discount (.25%). There are no application or origination fees, and no prepayment penalties. The monthly payment for a sample $10,000 loan with an APR of 2.88% per year for a 5-year term would be $179.15. The monthly payment for a sample $10,000 loan with an APR of 3.40% for a 7-year term would be $134.17. The monthly payment for a sample $10,000 loan with an APR of 3.45% for a 8-year term would be $119.35. The monthly payment for a sample $10,000 with an APR of 3.89% for a 10-year term would be $100.72. The monthly payment for a sample $10,000 with an APR of 4.18% for a 12-year term would be $88.43. The monthly payment for a sample $10,000 loan with an APR of 4.20% for a 15-year term would be $74.98. The monthly payment for a sample $10,000 loan with an APR of 4.51% for a 20-year term would be from $63.32.

Variable APR: Annual Percentage Rate [APR] is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Variable rate options range from 1.99% (with autopay) to 7.10% (without autopay) and will vary based on application terms, level of degree and presence of a co-signer. Our lowest rate option is shown with a 0.25% autopay discount. Our highest rate option does not include an autopay discount. The variable rates are based on the Variable rate index, is based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As of April 27, 2020, the one-month LIBOR rate is 0.43763%. The interest rate on a variable rate loan is comprised of an index and margin added together. The margin is a fixed amount (disclosed at the time of your loan application) added each month to the index to determine the next month’s variable rate. Variable rate options without an autopay discount consist of a range from 2.01% per year to 6.30% per year for a 5-year term, 4.00% per year to 6.35% per year for a 7-year term, 2.09% per year to 3.92% per year for a 8-year term, 4.25% per year to 6.40% per year for a 10-year term, 2.67% per year to 4.56% per year for a 12-year term, 3.44% per year to 6.65% per year for a 15-year term, 4.75% per year to 6.93% per year for a 20-year term, or 5.14% per year to 7.10% for a 25-year term, with no origination fees. APR is subject to increase after consummation. Variable interest rates will fluctuate over the term of the borrower’s loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a co-signer. The maximum variable rate may be between 9.00% and 16.00%, depending on loan term. The floor rate may be between 0.54% and 4.21%, depending on loan term. These rates are subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
Variable APRs and amounts subject to increase or decrease. Variable rates are indexed to the one-month LIBOR rate. The following Variable Rate examples are based on a $10,000 loan amount. Repayment examples are for illustrative purposes only. All student loan rates below are shown without the autopay discount (.25%). There are no application or origination fees, and no prepayment penalties. The monthly payment for a sample $10,000 loan with an APR of 2.01% per year for a 5-year term would be $175.32. The monthly payment for a sample $10,000 loan with an APR of 4.00% for a 7-year term would be $136.69. The monthly payment for a sample $10,000 loan with an APR of 2.09% for a 8-year term would be $113.21. The monthly payment for a sample $10,000 with an APR of 4.25% for a 10-year term would be $102.44. The monthly payment for a sample $10,000 with an APR of 2.67% for a 12-year term would be $81.24. The monthly payment for a sample $10,000 loan with an APR of 3.44% for a 15-year term would be $71.19. The monthly payment for a sample $10,000 loan with an APR of 4.75% for a 20-year term would be from $64.62. The monthly payment for a sample $10,000 loan with an APR of 5.14% for a 25-year term would be from $59.28.

 


3 Important Disclosures for SoFi.

SoFi Disclosures

  1. Student loan Refinance: Fixed rates from 3.20% APR to 6.44% APR (with AutoPay). Variable rates from 2.99% APR to 6.44% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loanSee APR examples and terms. Lowest variable rate of 3.21% APR assumes current 1 month LIBOR rate of 0.18% plus 2.82% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. See eligibility details. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score. Soft credit inquiries allow SoFi to show you what rates and terms SoFi can offer you up front. After seeing your rates, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit inquiry. Hard credit inquiries (or hard credit pulls) are required for SoFi to be able to issue you a loan. In addition to requiring your explicit permission, these credit pulls may impact your credit score. Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. 

4 Important Disclosures for Earnest.

Earnest Disclosures

To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.

Earnest fixed rate loan rates range from 3.19% APR (with Auto Pay) to 6.43% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 6.43% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of June 15, 2020, and are subject to change based on market conditions and borrower eligibility.

Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.

The information provided on this page is updated as of 6/15/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.

© 2020 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.


5 Important Disclosures for CommonBond.

CommonBond Disclosures

Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.19% effective June 10, 2020.

Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.