Have you ever wondered what would happen if you just stopped paying back your private student loans?
While defaulting on student loans can cause you a world of trouble, there is a statute of limitations on private student loans. This means that after this statute is up, lenders can’t take any legal action against you.
But what exactly happens to unpaid private student loans? And how do they affect your credit score? Here’s how the following rules affect you and your finances.
1. There’s a statute of limitations on private student loans
Even though defaulting on student loans is a risky financial move not usually recommended, when the statute of limitations runs out there’s not much lenders can do to collect.
Although collection agencies can still call you, they won’t be able to win against you in court. Keep in mind though that the statute of limitations varies by state and begins from the date of your last payment.
What’s more, if you resume payments at any time, then the statute of limitation resets. Sometimes even admitting that debt is yours in writing can restart the statute.
Debt collectors can take advantage of borrowers’ ignorance of the laws to restart the statute of an old loan. To learn more about their tactics, check out this 2015 report on “zombie debt” by the National Consumer Law Center.
The statute of limitations on private student loans varies from as few as three years in certain states to as many as 10 years in others. State laws also have different statutes for written contracts, oral agreements, and promissory notes.
The statute typically applies to your current state of residency, rather than the state you took out the loan in. However, the waters can get murky there so expect debt collectors to look for loopholes on this issue.
To clarify your situation, you should speak with a lawyer or call up your state’s attorney general’s office. When it comes to your options and rights, listen to a lawyer, not a debt collector.
Besides the statute of limitations, there’s a second limit on the repercussions of private student loan default. It has to do with your credit score.
2. Private student loan debt falls off your credit report
You may be relieved to hear that most private student loan debt, like other private debt, will fall off your credit report after seven years. It will no longer drag down your credit score, and you can start to rebuild your credit from the ground up.
That being said, all those years of default on student loans will have completely tanked your credit score. And a poor credit score can make your life pretty miserable. It can prevent you from qualifying for a mortgage, an auto loan, or even an apartment rental.
A bad credit score may not feel significant right after graduating college, but it can become a serious burden as you move into your late 20s and 30s.
3. Your student loan could be sold to a debt collector
If you have a huge amount of private student loan debt and high-interest rates, you may be tempted to stop paying altogether. There are a rare few out there who preach this approach, like writer Lee Siegel in his widely discussed New York Times editorial.
Before treading down this controversial path, you should know everything that can happen.
First off, if you miss payments, your loans will keep growing thanks to compound interest rates. Your debt will become more and more insurmountable the longer you avoid it.
Secondly, your original lender will likely sell your loan to a debt collector. And third-party collection agencies pursue repayment aggressively.
They may call you several times a day, send letters, even try and contact you while you’re at work. Debt collectors could also contact your family, friends, or neighbors. And you probably don’t want your boss or inner circle learning all about your financial troubles without your consent.
To learn more about your rights against harassment from debt collectors, check out the Fair Debt Collections Practices Act.
4. Defaulting on student loans could get you sued
The biggest consequence of defaulting on your private student loans that overshadows all the rest is that you could get sued.
Although collection agencies can’t sue you once the statute of limitations on a private student loan expires, they certainly can before that time. An agency can summon you to court for defaulting on one, several, or all of your private student loans.
If this happens, then you’ll have to consult a financial attorney to discuss your options, which could cost you a pretty penny. And if you lose in court, then you’ll have to start repaying your loans again.
If you still don’t pay, then the debt collector could garnish your wages or make direct withdrawals from your bank account. The collector isn’t allowed to touch your federal benefits, though, like your Social Security.
5. You could (potentially) discharge your loans through bankruptcy
As you can see, defaulting on your private student loans can severely weigh you down in life just as you’re trying to move up.
But if you feel like there’s no way you can afford to pay your loans yet you want to avoid default, what are your options?
If your financial situation is dire, then you may qualify to discharge private student loans through bankruptcy.
Or, if you can manage to pay your loans back (but don’t know how to start) then you should come up with a plan of attack.
Gather all of your loans, interest rates, and repayment plans in one place. The Student Loan Hero dashboard can help you collect your loans and figure out your target repayment dates.
If you’re able to make more than the minimum payments toward your loans, then you should do so ASAP. The faster you pay off your loans, the less you’ll pay in interest in the long run. Consider earning some extra money on the side or apply any raises directly toward your loans as well.
Finally, consolidating and refinancing student loans is one of the best ways to simplify monthly payments, get a lower interest rate, and save money. People with a solid record of repayment qualify for the best refinancing offers — another reason to avoid going into default.
Student loan debt can feel like a huge burden, but there’s always light at the end of the tunnel. If you’re proactive about finding the right repayment plan, then you can steadily work your way towards financial freedom.
What’s next for my private student loan debt?
If refinancing your student loans is a potential solution, then check out this guide on how to get started on the process. And if you’re looking to pay off your loans as fast as possible, these six easy tips can help you make a serious dent in your student loan debt.
You might even be eligible for student loan forgiveness and not know it. This full list of loan forgiveness programs could get you on the right path towards lightening your debt load.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!
1 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 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.97% 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 Month/Day/Year, 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 08/21/18. 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@example.com, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 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.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. 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. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
3 Important Disclosures for SoFi.
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.
5 Important Disclosures for CommonBond.
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 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate|
|2.46% – 6.97%1||Undergrad & Graduate|
|2.57% – 8.44%4||Undergrad & Graduate|
|3.05% – 6.47%2||Undergrad & Graduate|
|2.50% – 7.24%5||Undergrad & Graduate|
|2.79% – 8.39%6||Undergrad & Graduate|