Note: Collections on all federal student loans have been suspended as part of efforts to ease the impact of the coronavirus pandemic. Please visit our Student Loan Hero Coronavirus Information Center for more.
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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…
Whether or not you get sued for your student loans will depend on whether your loans are federal or private.
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 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.
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.
- 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
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.
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.
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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 Feburary 1, 2021.
2 Important Disclosures for Earnest.
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 2.98% APR (with Auto Pay) to 5.49% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.34% 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 October 26, 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 10/26/2020. 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.
3 Important Disclosures for CommonBond.
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.
4 Important Disclosures for LendKey.
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 02/17/2021 student loan refinancing rates range from 1.91% APR – 5.25% Variable APR with AutoPay and 2.95% APR – 7.63% Fixed APR with AutoPay.
5 Important Disclosures for SoFi.
6 Important Disclosures for PenFed.
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 2.99%-5.15% APR and Variable Rates range from 2.17%-4.47% 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.