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If you have defaulted on a student loan, it is important to understand the statute of limitations for student loans to avoid potential legal issues. (iStock)
Most creditors and debt collectors have a limited window to file a lawsuit to collect the debt. This window is known as the statute of limitations.
If you have defaulted on your federal or private student loans, it is important to know the statute of limitations that applies to your loan. This article will cover whether there is a statute of limitations on student loans, how long it lasts, and what it means for you.
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- Is there a statute of limitations on student loan debt?
- When do student loan statute limits begin?
- What happens when the student loan statute of limitations expires?
- Should you try to settle your student loan debt?
- Ways to reduce student loan debt
Most statutes of limitations range from three to six years, according to the Consumer Financial Protection Bureau (CFPB), but this can vary by state law, the type of loan you have, and the terms of your credit agreement.
Federal student loan statute of limitations
Unfortunately for struggling student loan borrowers, there is no statute of limitations period for federal student loans. No matter how long your federal student loans have been in default, the federal government can pursue collection by forfeiture of wage garnishments or tax refunds or other government benefits. But decorations cannot exceed 15% of your disposable pay.
Private Student Loan Statutes of Limitations
Most states have different statutes of limitations depending on the type of loan you have. There are generally four types of loans:
- verbal agreement – With an oral agreement, you borrow money from someone and agree to pay it back, but not in writing.
- written agreement – You have a written agreement that details how much you’ve borrowed, when you’ve borrowed it, how much interest you’ll be charged, how you’ll make payments, and other terms. This is common with auto loans and medical loans.
- Promissory note – Promissory notes are written agreements but are usually less detailed than written contracts. Mortgages and student loans are usually considered promissory notes.
- Open ended accounts These are credit accounts that remain open for an indefinite period. Credit card loans and other lines of credit fall into this category.
A state may have different statutes for credit cards, oral agreements, written agreements, and promissory notes, and time limits for each type of loan. Varies by State, In most states, the statute of limitations for promissory loans (which includes most private student loans) is six years, but it can be as short as three years or as long as 10 years.
Once the statute of limitations is passed, the debt is considered “time-barred,” and the creditor cannot sue you or threaten to sue you.
The statute of limitations usually begins when you have missed a payment on a loan, although it can also begin when you have made your most recent payment or a partial payment. The official start date also varies by state law.
For example, say the statute of limitations private student loans Your state has six years and starts from the date you missed the payment. If you missed your payment on January 1, 2021, your statute of limitations will last until December 31, 2027.
Contact your state’s attorney general’s office or an attorney familiar with your state’s debt collection laws to learn about the laws that apply to your situation.
Can You Resume Student Loan Statute Limitations?
In some states, the statute of limitations can easily be reintroduced. For example, if your state starts the clock on your last payment date, making a partial payment — even after your loan defaults — can restart the clock. Some states restart the clock on the statute of limitations if you accept the loan in writing.
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If your debt is outside the statute of limitations, it doesn’t mean you no longer owe money. It simply means that the lender has less collection options and can no longer sue you for collecting the balance amount.
Lenders can still try to get the loan by calling you and sending you letters, as long as they don’t breach it. Fair Debt Collection Practices Act,
If a creditor or debt collector sues you after the statute of limitations has expired, don’t ignore it. According to the CFPB, even if you do not extend the statute of limitations as a defense, a court can still award a judgment against you. For this reason, it is a good idea to discuss your situation with an attorney familiar with the debt collection laws in your state.
settle your student loan debt This involves negotiating with the lender and agreeing to accept less than the full amount owed as the final payment on your loan.
This may sound tempting – especially if you can’t pay off your debt in full. But there are also some drawbacks, such as:
- Damage to your credit score When you settle a loan, it shows up on your credit score as a “settlement.” This is a negative item on your credit report and will remain there for seven years, lowering your score.
- High Fee / Low Success Rate – Many companies advertise debt settlement services, which promise to help you get out of debt for “money on the dollar.” But their services are expensive, with fees ranging from 15% to 25% of the total loan you enroll in the program. Moreover, it is not always successful. Less than half of loans are settled after three years, According to the National Foundation for Credit Counseling, a non-profit credit counseling organization.
- Forgiven debt can be taxable – Generally, when a debt is settled or forgiven, the amount forgiven is considered taxable income. While some federal student loan forgiveness programs are not taxable, settled private student loans are generally taxable.
If you decide to settle with a creditor, get the creditor’s agreement in writing before you make your payment. Otherwise, you may renegotiate the statute of limitations on your debt, only to find that the creditor does not plan to live up to the end of the agreement.
Waiting for the statute of limitations isn’t the only — or best — way to deal with student loan debt. If you’re having trouble making a payment or you’re already in default, consider these options:
- Refinance your student loans. refinancing your student loans Can allow you to swap out your current student loans for a new loan with a lower interest rate, which will save you money over time. But proceed with caution before refinancing federal student loans. Refinancing Federal Debts into a Private Loan This means losing valuable gains and protections, including deferments, forbearance, income-driven repayment plans and federal loan forgiveness programs.
- Enroll in an income-driven repayment plan. An income-driven repayment plan sets your monthly federal student loan payment based on your income and family size with the intention of being affordable. The Department of Education offers four income-driven repayment plans, all of which forgive any remaining loan balances if your loans are not fully repaid at the end of the repayment period.
- Sign up for an extended repayment plan. An extended repayment plan is a type of repayment plan offered by the Department of Education that allows you to make lower monthly payments over a longer period of time — usually 25 years. This can help make your monthly payment more affordable. But keep in mind that increasing your repayment period means you will pay more total interest.
- Consider avoidance or tolerance. Delay and forbearance both allow you to temporarily postpone or reduce your federal student loan payments. A moratorium is usually available when you are experiencing temporary personal or financial hardship. Examples include being treated for cancer, serving in the Peace Corps or the military, unemployment, or returning to school. While your loans are in moratorium, no interest will be charged. even if you don’t eligible for adjournmentHowever, you may still qualify for forbearance if you cannot make your federal student loan payments due to financial hardship, medical expenses, change of employment, or other reasons. While in forbearance, interest will continue to accrue.
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