Have you ever wondered what would happen if you just stopped paying back your private student loans? While defaulting on debt can cause you a world of trouble, you might not realize that there’s a statute of limitations for student loans.
This means that after the statute of limitations is up, lenders can’t take any legal action against you for the unpaid debt.
At first, this might sound like an opportunity to dodge your debt, but it’s generally not a good idea. Here’s a rundown of the statute of limitations on private student loans, including exactly what happens to unpaid debt and how your finances can be impacted.
What’s the student loan statute of limitations?
Even though defaulting on student loans is a risky financial move that’s not recommended, when the student loan 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.
The statute of limitations on private student loans varies by state, 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 legal time limit begins from the date of your last payment. If you stop repaying your debt but then resume payments at any time, the statute of limitations resets. Sometimes even admitting that debt is yours in writing can restart the statute.
In fact, debt collectors can take advantage of borrowers’ ignorance of the laws to restart the statute of an old loan, as the National Consumer Law Center notes in this 2015 report on “zombie debt.”
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. If you don’t have the money for legal fees, know too that there are low-cost and free options out there.
Besides the statute of limitations, there’s a second limit on the repercussions of defaulting on private student loans, and it has to do with your credit score.
Private student loan debt falls off your credit report
You may be relieved to hear that most private student loan 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 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.
Your student loan could be sold to a debt collector
If you have a huge amount of private student loan debt at high interest rates, you may be tempted to stop paying altogether. There are a rare few out there who advocate this approach.
But before treading down this dangerous path, you should know everything that can happen.
First off, if you miss payments, your loans will keep growing thanks to capitalized interest. 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 tend to pursue repayment aggressively. They may call you several times a day, send letters, even try to contact you while you’re at work.
Not all of this is actually allowed — for example, they need your permission to call you at work — so make sure you know your rights under the Fair Debt Collection Practices Act.
Defaulting on student loans could get you sued
The biggest consequence of defaulting on your private student loans, overshadowing all the rest, is the possibility of a lawsuit.
Although collection agencies can’t sue you when the statute of limitations on the private student loan expires, they certainly can do so 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 very likely want to consult a financial attorney to discuss your options. (See our suggestions on this above). If you lose in court, then you’ll have to start repaying your loans again — and if you still don’t pay at that point, the debt collector could be granted permission to garnish your wages or seize your assets.
You could (maybe) 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 truly dire, you may qualify to discharge private student loans through bankruptcy. Note that this process is currently very difficult to do, but it does happen.
Still, bankruptcy can wreck your credit and cause headaches for some time to come. However, if you can manage to pay your loans back (but don’t know how to start), then you’re better off coming up with a different plan of attack.
What’s next for my private student loan debt?
If you’re looking for a more stable financial future, there are better ways to get out of private student loan debt than defaulting and trying to stall for time.
Although private debt doesn’t have the same options as federal debt (such as income-driven repayment plans), you can often work with your lender to find a manageable solution for repayment.
And private loans are usually good candidates for refinancing — if you or a cosigner can qualify — since this comes with the opportunity to adjust your monthly payments and possibly even lower your interest rate. This method can be a game-changer if you can get the right deal on your refinanced loan.
Even better, you might be eligible for student loan forgiveness and not know it. This list of student loan forgiveness programs could get you out of debt more quickly than you thought possible.
Student loans 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 strategy, then you can steadily work your way toward financial freedom.
Renee Morad contributed to this report.
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Undergraduate Rate Disclosure: Variable 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 March 1, 2020, the one-month LIBOR rate is 1.62%. Variable interest rates range from 2.72% – 10.98% (2.72% – 10.83% APR) and will fluctuate over the term of the loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a co-signer. Fixed interest rates range from 4.72% – 12.19% (4.72% – 12.04% APR) based on applicable terms, level of degree earned and presence of a co-signer. Lowest rates shown requires application with a co-signer, are for eligible applicants, require a 5-year repayment term, borrower making scheduled payments while in school and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. 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 One 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 the loan.
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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.
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|2.75% – 10.65%*,1||Undergraduate and Graduate|
|2.84% – 10.97%2||Undergraduate, Graduate, and Parents|
|2.80% – 11.37%3||Undergraduate and Graduate|
|3.52% – 9.50%4||Undergraduate and Graduate|
|3.14% – 11.88%5||Undergraduate and Graduate|
|2.72% – 10.98%6||Undergraduate and Graduate|