How to Handle a Student Loan Lawsuit

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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 9 lenders of 2021!
LenderVariable APREligible Degrees 
1.88% – 6.15%1Undergrad
& Graduate

Visit Splash

1.88% – 5.64%2Undergrad
& Graduate

Visit Earnest

1.88% – 5.64%3Undergrad
& Graduate

Visit NaviRefi

2.50% – 6.85%4Undergrad
& Graduate

Visit CommonBond

2.25% – 6.39%5Undergrad
& Graduate

Visit SoFi

1.90% – 5.25%6Undergrad
& Graduate

Visit Lendkey

1.89% – 5.90%7Undergrad
& Graduate

Visit Laurel Road

2.39% – 6.01%Undergrad
& Graduate

Visit Elfi

2.13% – 5.25%8Undergrad
& Graduate

Visit PenFed

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

Splash Financial Disclosures

Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount

The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.

To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

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 June 1, 2021.


2 Rate range above includes optional 0.25% Auto Pay discount. Important Disclosures for Earnest.

Earnest Disclosures

Interest Rate Disclosure

Actual rate and available repayment terms will vary based on your income. Fixed rates range from 2.59% APR to 5.79% APR (excludes 0.25% Auto Pay discount). Variable rates range from 1.88% APR to 5.64% APR (excludes 0.25% Auto Pay discount). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 36% (the maximum allowable for these loans). Earnest variable interest rate student loan refinance 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 2.04% and 5.8% to the one month LIBOR. Earnest rate ranges are current as of 6/8/2021, and are subject to change based on market conditions.

Auto Pay Discount Disclosure

You can take advantage of the Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. Interest rate incentives for utilizing Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction. For multi-party loans, only one party may enroll in Auto Pay.

Student Loan Refinancing Loan Cost Examples

These examples provide estimates based on payments beginning immediately upon loan disbursement. Variable APR: A $10,000 loan with a 20-year term (240 monthly payments of $72) and a 5.89% APR would result in a total estimated payment amount of $17,042.39. For a variable loan, after your starting rate is set, your rate will then vary with the market. Fixed APR: A $10,000 loan with a 20-year term (240 monthly payments of $72) and a 6.04% APR would result in a total estimated payment amount of $17,249.77. Your actual repayment terms may vary.Terms and Conditions apply. Visit https://www.earnest. com/terms-of-service, e-mail us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.

Earnest Loans are made by Earnest Operations LLC or One American Bank, Member FDIC. Earnest Operations LLC, NMLS #1204917. 535 Mission St., Suite 1663, San Francisco, CA 94105. California Financing Law License 6054788. Visit earnest.com/licenses for a full list of licensed states. For California residents (Student Loan Refinance Only): Loans will be arranged or made pursuant to a California Financing Law License.

One American Bank, 515 S. Minnesota Ave, Sioux Falls, SD 57104. Earnest loans are serviced by Earnest Operations LLC with support from Navient Solutions LLC (NMLS #212430). One American Bank and Earnest LLC and its subsidiaries are not sponsored by or agencies of the United States of America.

© 2021 Earnest LLC. All rights reserved.


3 Important Disclosures for Navient.

Navient Disclosures

1. NaviRefi loans are made by Earnest Operations LLC, a member of the Navient family of companies, subject to individual approval and underwriting criteria. California residents only: Loans made or arranged pursuant to a California Finance Lenders Law license. Additional terms and conditions apply.

– To qualify, you must be a U.S. citizen or non-citizen permanent resident of the United States, reside in a state we lend in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.navirefi.com/help-and-questions. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Loan terms are subject to eligibility. Approval and interest rate depend on the review of a complete application. Loan approval is subject to confirmation that your debt-to-income, free cash flow, credit history and application information meet the minimum requirements. You must have a minimum FICO score to be considered.

– You can choose between fixed and variable rates. Fixed interest rates are 2.75% – 6.04% APR (2.50% – 5.79% APR with Auto Pay discount). Starting variable interest rates are 2.13% – 5.89% APR (1.88% – 5.64% APR with Auto Pay discount). Variable rates are based on an index, the 30-day Average Secured Overnight Financing Rate (SOFR) plus a margin. Variable rates are reset monthly based on the fluctuation of the index. We do not currently offer variable rate loans in AK, CO, CT, HI, IL, KY, MA, MN, MS, NH, OH, OK, SC, TN, TX, and VA.

– You can take advantage of the 0.25% Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. Interest rate incentives for utilizing Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction. NaviRefi rate ranges are current as of June 1, 2021 and are subject to change based on market conditions and borrower eligibility.

– The information provided on this page is updated as of 06/1/2021. Earnest Operations LLC reserves the right to modify or discontinue (in whole or in part) this loan program and its associated services and benefits at any time without notice. Check www.navirefi.com for the most up-to-date information. Terms and Conditions apply. Call 855-284-4893 for more information on our student loan refinance product.

– Earnest Operations LLC – NMLS #1204917, CA CFL #6054788 – 535 Mission St., Suite 1663, San Francisco, CA 94105.
Navient Solutions, LLC – NMLS #212430 – 123 Justison St., Wilmington, DE 19801. Visit https://navirefi.com/lending-licenses for a full list of licensed states.


4 Important Disclosures for CommonBond.

CommonBond Disclosures

Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. 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 0.15% effective Jan 1, 2021 and may increase after consummation.


5 Important Disclosures for SoFi.

SoFi Disclosures

Fixed rates from 2.74% APR to 6.74% APR (with autopay). Variable rates from 2.25% APR to 6.39% APR (with autopay). All variable rates are based on the 1-month LIBOR and may increase after consummation if LIBOR increases; see more at SoFi.com/legal/#1. If approved for a loan your rate will depend on a variety of factors such as your credit profile, your application and your selected loan terms. Your rate will be within the ranges of rates listed above. Lowest rates reserved for the most creditworthy borrowers. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers, or may become available, such as Income Based Repayment or Income Contingent Repayment or PAYE. SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license #6054612; NMLS #1121636 (www.nmlsconsumeraccess.org). Additional terms and conditions apply; see SoFi.com/eligibility for details. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.


6 Important Disclosures for LendKey.

LendKey Disclosures

Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it  endorse,  any educational institution.

Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of  5 years and is reserved for applicants with FICO scores of at least 810.

As of 04/07/2021 student loan refinancing rates range from 1.90% APR – 5.25% Variable APR with AutoPay and 2.95% APR – 7.63% Fixed APR with AutoPay.


7 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 April 29, 2021. Information and rates are subject to change without notice.
 


8 Important Disclosures for PenFed.

PenFed Disclosures

Annual Percentage Rate (APR) is the cost of credit calculating the interest rate, loan amount, repayment term and the timing of payments. Fixed Rates range from 2.89%-4.78% APR and Variable Rates range from 2.13%-5.25% APR. Both Fixed and Variable Rates will vary based on application terms, level of degree and presence of a co-signer. These rates are subject to additional terms and conditions and rates are subject to change at any time without notice. For Variable Rate student loans, the rate will never exceed 9.00% for 5 year and 8 year loans and 10.00% for 12 and 15 years loans (the maximum allowable for this loan). Minimum variable rate will be 2.00%. 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.