How to Handle a Student Loan Lawsuit

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The bailiff tells everyone to rise as the judge enters the courtroom. As you’re summoned to take the stand, you raise your right hand and swear to tell the truth about why you’ve gone into default with your student loans, as the plaintiff — your lender — watches on.

While this type of legal fiasco might be common in a high-profile criminal trial, a student loan lawsuit isn’t quite as dramatic. You won’t find yourself behind bars if you’re ordered to pay up. (Unless you try to flee the country, of course.)

But being sued by debt collector or lender is still a very real possibility if you’ve defaulted on your payments. It can have severe consequences, making an already difficult financial situation harder to break free from.

What happens in a student loan lawsuit?

Any lender, federal or private, has the right to sue you over defaulted payments that have gone delinquent, and if attempts at collecting them from you have failed.

Surprisingly, the government may not resort to legal action right away. The Department of Education and Internal Revenue Service have the advantage of wage garnishment or tax-refund offsetting as ways to get defaulted borrowers to pay up first.

Private student loan lenders may have the freedom to set their own terms and interest rates, but they have little leeway in getting borrowers to pay up since they don’t have the backing of the government. Thus, a lawsuit may be their most common response to a severely delinquent loan.

If you find yourself embroiled in the beginnings of a debt collection lawsuit, follow some of these tips:

  • Don’t panic!
    The police won’t come to your residence to arrest you. You’ll usually receive a certified letter in the mail notifying you that you’ve been subpoenaed to court.
  • Hire a student loan attorney.
    Hiring a good lawyer can help you sort out your options before a lawsuit gets to court. They can help prepare your best defense and represent you in responding to summons, paperwork, and communicating with your lender’s attorneys.
  • Stick to deadlines.
    Always respond to a summons or other legal correspondence on time. Ignoring the court may mean a ruling in favor of your lender without you getting to tell your side of the story.
  • Look for extensions.
    If you were actively serving in the military when you were notified of your lawsuit, you can be granted a delay in the start of proceedings — called a “stay” — usually for about 90 days.

Remember that being sued doesn’t mean you’ve automatically lost. Like any legal battle, it means that you have a chance to find representation, go to court, and hash out the facts. Don’t ignore the lawsuit and hope that it, or your loans, will just go away. They won’t.

Common student loan lawsuit defenses

According to Student Loan Borrower Assistance, simply raising a good defense in a debt collection lawsuit may lead to a lender dropping your case, so the reasons you give the court are very important. Some examples include:

  • Your identity was stolen and you never agreed to pay the debt; it’s not yours.
  • You paid the total amount of the loan, but the lender isn’t current on their records.
  • The debt was released in bankruptcy.
  • 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.
  • Your lender waited too long to sue.

Even if none of these defenses apply to you, you and your attorney will need to check the facts.

To do your own homework, check your credit report for any errors. Is the loan indeed paid up, and you’re being sued in error? Is the amount they’re claiming on you correct? And — the judge will determine this — is the collection legally enforceable?

What happens if you win

Simply put, if you win the lawsuit, you don’t owe any money. Of course, a victory will depend on the strength of your legal defense and the validity of your individual circumstances.

If your defense holds water, the court will absolve you of your responsibility to repay what your lender claims you owe. In some lucky instances, the plaintiff may even be required to pay your court fees and legal expenses.

What happens if you lose

Should you ignore the lawsuit or if you put up a solid defense but still lose your case, the court will issue a judgment against you ordering to pay the amount you owe on your student loans. A creditor can then go to various lengths to obtain the money you owe them, including wage garnishment.

At this stage, you may attempt to appeal your case. However, this usually involves an appellate judge reviewing the details and facts of the case and making their own ruling. It’s not a retrial allowing you to reappear in court and try your case again.

You may also be able to assert various exemption rights depending on your financial status. In some cases, defendants may be able to successfully claim that they’re “judgment proof” or “collection proof.”

If you can prove that you have very little money and own few assets, a creditor can’t seize your home, household goods, your car, or raid too much of your earnings or retirement accounts. Homestead exemptions may also protect the equity in your house, depending on the state you live in.

However, if your income was to increase over a certain amount, this exemption may disappear since it may indicate that you can afford to pay back your loans.

Have no fear, negotiation is here

You can aim to negotiate with your creditor and settle the lawsuit out of court. If a reasonable monetary settlement can be reached before you ever step foot into a courtroom, all the better, since it preserves and saves legal costs and attorney fees on both sides.

In a typical federal loan settlement, you may be able to cut down the amount you owe by about 10 percent, through a reduction of the loan’s total balance and waiving of collection fees. Depending on the lender, private loans, according to some legal sources, may often settle anywhere between 30 percent to 80 percent of the amount you may owe.

How to avoid being sued by debt collector

Avoiding a debt collection lawsuit means staying out of default. Making sure you don’t become delinquent on your monthly loan repayments will keep you from being sued by debt collector or lender.

Examine all your options before ever coming close to a legal fracas with your loan provider. If you’re in financial trouble, contact them to work out a payment plan.

Will a graduated or extended option work better for your finances than a standard plan? How about applying for an income-based plan? Deferment or forbearance are other alternatives, too.

Work out the best budget you can according to your current income and expenses, and see what changes you can make in your spending to conserve some money towards your loan payments. The more you’re able to pay down, the further away you’ll stay from going to court over a financial matter that could have been prevented.

Interested in refinancing student loans?

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1 Important Disclosures for Laurel Road.

Laurel Road Disclosures

  1. VARIABLE APR – APR is subject to increase after consummation. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes.

2 Important Disclosures for SoFi.

SoFi Disclosures

  1. Student Loan RefinanceFixed rates from 3.999% APR to 7.804% APR (with AutoPay). Variable rates from 2.480% APR to 7.524% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.480% APR assumes current 1 month LIBOR rate of 2.07% plus 0.91% 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. 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
  2. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

3 Important Disclosures for CommonBond.

CommonBond Disclosures

  1. Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). The following table displays the estimated monthly payment, total interest, and Annual Percentage Rates (APR) for a $10,000 loan. The Annual Percentage Rate (APR) shown for each in-school loan product reflects the accruing interest, the effect of one-time capitalization of interest at the end of a deferment period, a 2% origination fee, and the applicable Repayment Plan. All loans are eligible for a 0.25% reduction in interest rate by agreeing to automatic payment withdrawals once in repayment, which is reflected in the interest rates and APRs displayed. Variable rates may increase after consummation. All variable rates are based on a 1-month LIBOR assumption of 2.08% effective July 25, 2018.

4 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Education Refinance Loan Rate DisclosureVariable rate, 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 August 1, 2018, the one-month LIBOR rate is 2.07%. Variable interest rates range from 2.72%-8.17% (2.72%-8.17% APR) and 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 cosigner. Fixed interest rates range from 3.50%-8.69% (3.50% – 8.69% APR) based on applicable terms, level of degree earned and presence of a cosigner. Lowest rates shown require application with a cosigner, are for eligible, creditworthy applicants with a graduate level degree, require a 5-year repayment term and include our Loyalty discount and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty and Automatic Payment Discount disclosures. The maximum variable rate on the Education Refinance Loan is the greater of 21.00% or Prime Rate plus 9.00%. 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. Please note: Due to federal regulations, Citizens Bank is required to provide every potential borrower with disclosure information before they apply for a private student loan. The borrower will be presented with an Application Disclosure and an Approval Disclosure within the application process before they accept the terms and conditions of their loan.
  2. Federal Loan vs. Private Loan Benefits: Some federal student loans include unique benefits that the borrower may not receive with a private student loan, some of which we do not offer with the Education Refinance Loan. Borrowers should carefully review their current benefits, especially if they work in public service, are in the military, are currently on or considering income based repayment options or are concerned about a steady source of future income and would want to lower their payments at some time in the future. When the borrower refinances, they waive any current and potential future benefits of their federal loans and replace those with the benefits of the Education Refinance Loan. For more information about federal student loan benefits and federal loan consolidation, visit http://studentaid.ed.gov/. We also have several resources available to help the borrower make a decision at http://www.citizensbank.com/EdRefinance, including Should I Refinance My Student Loans? and our FAQs. Should I Refinance My Student Loans? includes a comparison of federal and private student loan benefits that we encourage the borrower to review.
  3. Citizens Bank Education Refinance Loan Eligibility: Eligible applicants may not be currently enrolled, must be in repayment of their existing student loan(s) and must make the minimum number of payments after leaving school. Primary borrowers must be a U.S. citizen, permanent resident or resident alien with a valid U.S. Social Security Number residing in the United States. Resident aliens must apply with a co-signer who is a U.S. citizen or permanent resident. The co-signer (if applicable) must be a U.S. citizen or permanent resident with a valid U.S. Social Security Number residing in the United States. For applicants who have not attained the age of majority in their state of residence, a co-signer will be required. Citizens Bank reserves the right to modify eligibility criteria at anytime. Interest rate ranges subject to change. Education Refinance Loans are subject to credit qualification, completion of a loan application/consumer credit agreement, verification of application information, certification of borrower’s student loan amount(s) and highest degree earned.
  4. Loyalty Discount Disclosure: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower or their co-signer (if applicable) has a qualifying account in existence with us at the time the borrower and their co-signer (if applicable) have submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, or other student loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI, and VT and some products may have an associated cost. This discount will be reflected in the interest rate disclosed in the Loan Approval Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  5. Automatic Payment Discount Disclosure: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
  6. Co-signer Release: Borrowers may apply for co-signer release after making 36 consecutive on-time payments of principal and interest. For the purpose of the application for co-signer release, on-time payments are defined as payments received within 15 days of the due date. Interest only payments do not qualify. The borrower must meet certain credit and eligibility guidelines when applying for the co-signer release. Borrowers must complete an application for release and provide income verification documents as part of the review. Borrowers who use deferment or forbearance will need to make 36 consecutive on-time payments after reentering repayment to qualify for release. The borrower applying for co-signer release must be a U.S. citizen or permanent resident. If an application for co-signer release is denied, the borrower may not reapply for co-signer release until at least one year from the date the application for co-signer release was received. Terms and conditions apply.
  7. Average savings based on 18,113 actual customers who refinanced their federal and private student loans through our Education Refinance Loan between January 1, 2017 and December 31, 2017. The calculation is derived by averaging the monthly savings of Education Refinance Loan customers whose payments decreased after refinancing, which is calculated by taking the monthly student loan payments prior to refinancing minus the monthly student loan payments after refinancing. The borrower’s savings might vary based on the interest rates, balances and remaining repayment term of the loans they are seeking to refinance. The borrower’s overall repayment amount may be higher than the loans they are refinancing even if their monthly payments are lower.
2.57% – 5.87%Undergrad
& Graduate
Visit Earnest
2.80% – 6.38%1Undergrad
& Graduate
Visit Laurel Road
2.48% – 7.52%2Undergrad
& Graduate
Visit SoFi
2.47% – 7.99%Undergrad
& Graduate
Visit Lendkey
2.57% – 6.65%3Undergrad
& Graduate
Visit CommonBond
2.72% – 8.17%4Undergrad
& Graduate
Visit Citizens
Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. 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 understand what you are buying, and consult 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. Please do your homework and let us know if you have any questions or concerns.