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Understanding the Statute of Limitations on Student Loans

usnews.com | October 27, 2016

By Betsy Mayotte

It's important to know your rights before you borrow student loans – or any loan, for that matter. This includes understanding the methods and parameters of how the debt will be collected if you fall past due or have other financial struggles.

In this week's post, we review the various statutes of limitations that apply to private student loan collection. This is just one of the terms and conditions borrowers need to be aware of when considering student loans.

Note: The Student Loan Ranger is not an attorney. When dealing with legal matters and concerns, consult a lawyer.

In the context of debt collection, a statute of limitations is a set amount of time that a creditor has to sue you for an unpaid debt. A statute of limitations applies to private student loans but not to federal student loans, such as Stafford, Perkins, Parent PLUS and federal consolidation loans. That time varies by state.

For some, it's as few as three years; for others, it's as many as 10 years. What confuses some consumers is that just because the statute of limitations has run out on a debt doesn't mean that the creditor still can't attempt to collect the loan from you – or that you may not be morally obligated to repay that debt, depending on the situation.

To be clear, the statute of limitations only bars the creditor from suing you – it doesn't wipe away the loan. If you aren't sure which statute of limitations rule applies to a particular debt, check with an attorney or your local attorney general's office. Also, note that if you ask, a collector is required by law to tell you if the statute of limitations for your loan has passed.

With that in mind, it's also important to understand that consumers can take action that may extend the statute of limitations. In some cases, by agreeing verbally or in writing that the debt is valid or by agreeing to repay the debt, you may extend or waive the existing statute of limitations period. Again, this only means the creditor has the option to sue you for the loan, something they are unlikely to do if you are making satisfactory payments.

Making a payment can also revive a statute of limitations. Say you stop paying your private student loan in 2010 in a state with a six-year statute of limitations on such debts. The clock starts ticking on the six-year limit in 2010 when you stop paying.

If you never make another payment nor do anything else that might extend the statute of limitations, the lender's ability to sue you for the rest of your private loan will end in 2016. If, however, you make a payment in 2013, the statute of limitations period may start again and not end until 2019.

Some creditors buy old debts from lenders for pennies on the dollar, then use aggressive collection tactics to attempt to collect the debts. While not an illegal practice in and of itself – remember, you still technically owe the debt – it is illegal if they harass, threaten or try to trick you into renewing the statute of limitations.

Thankfully, the courts can be fairly strict with creditors who attempt to do this and will sometimes not accept the renewal of that time frame if the borrower was not aware that he or she was doing so. If a creditor threatens to sue you on a debt where the statute of limitations has expired, contact an attorney or file a complaint with the Federal Trade Commission or even your state's attorney general's office.

The good news is that loans with expired statutes of limitations can be easy to settle. If the creditors know they can no longer force you to pay via legal action, they are often amenable to a settlement amount significantly less than what you actually owe.

As mentioned above, federal student loans have no statute of limitations. This means that even if the loan is 30 or 40 years old, for example, and you have made no payments, the federal government can sue for payment.

Meanwhile, interest and likely collection costs will continue to accrue, making the loan significantly more expensive.

This is one reason borrowers should check with their loan holder. Even if you don't think there is a remedy for your financial situation, there almost always is – and finding that solution will almost always be much cheaper in the long run than trying to ignore the problem and hope it goes away.

Understanding the collection rules for student loans is an important step when researching options to pay for college. While you should never borrow more than you anticipate being able to repay, it's also important to know what could happen if life and your finances don't go as planned.

 

 

 

 

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