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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College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
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5 Important Disclosures for SoFi.
UNDERGRADUATE LOANS: Fixed rates from 4.23% to 11.26% annual percentage rate (“APR”) (with autopay), variable rates from 1.88% to 11.66% APR (with autopay). GRADUATE LOANS: Fixed rates from 4.13% to 11.37% APR (with autopay), variable rates from 1.78% to 11.73% APR (with autopay). MBA AND LAW SCHOOL LOANS: Fixed rates from 4.30% to 11.52% APR (with autopay), variable rates from 1.95% to 11.89% APR (with autopay). PARENT LOANS: Fixed rates from 4.60% to 10.76% APR (with autopay), variable rates from 1.88% to 11.16% APR (with autopay). For variable rate loans, the variable interest rate is derived from the one-month LIBOR rate plus a margin and your APR may increase after origination if the LIBOR increases. Changes in the one-month LIBOR rate may cause your monthly payment to increase or decrease. Interest rates for variable rate loans are capped at 13.95%, unless required to be lower to comply with applicable law. Lowest rates are reserved for the most creditworthy borrowers. If approved for a loan, the interest rate offered will depend on your creditworthiness, the repayment option you select, the term and amount of the loan and other factors, and will be within the ranges of rates listed above. 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. Information current as of 11/04/2020. Enrolling in autopay is not required to receive a loan from SoFi. SoFi Lending Corp., licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. NMLS #1121636 (www.nmlsconsumeraccess.org).
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Before taking out private student loans, you should explore and compare all financial aid alternatives, including grants, scholarships, and federal student loans and consider your future monthly payments and income. Applying with a cosigner may improve your chance of getting approved and could help you qualify for a lower interest rate. Ascent Student Loans may be funded by Richland State Bank (RSB). Ascent Student Loan products are subject to credit qualification, completion of a loan application, verification of application information and certification of loan amount by a participating school. Loan products may not be available in certain jurisdictions, and certain restrictions, limitations; and terms and conditions may apply. Ascent is a federally registered trademark of Turnstile Capital Management (TCM) and may be used by RSB under limited license. Richland State Bank is a federally registered service mark of Richland State Bank.
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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 0.17% effective Sep 1, 2020 and may increase after consummation.