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Statute of Limitations on Student Loans – It is important to know your rights before you borrow student loans or any loan at all. This includes understanding the methods and parameters of how the debt will be collected if you fall past due or have other financial struggles.
This article will discuss on the statute of limitations that apply to private student loan and federal student loan collection, which is just one of the terms and conditions borrowers need to be aware of when considering student loans.
What is a Statute of Limitation?
A statute of limitation sets the period of time in which lenders can take legal actions against borrowers who have defaulted on their student loans. After a statute of limitation has passed, the student loans are considered to be time-barred debt.
What is a Time-barred Student Loan Debt?
Once a student loan has reached its statute of limitations, it is considered to be time-barred debt. Lenders may not take legal action against a borrower for not paying a time-barred debt; if the lender files suit against the borrower, the borrower can ask the court to dismiss the lawsuit. While lenders may not be allowed to sue for the unpaid debt, the debt does not disappear.
How does a Statute of Limitations apply to Private Student Loans?
A private student loan is one made without a guarantee by a public agency, such as a federal or state government. The state statute of limitations applies to private student loans. If the borrower moves out of state, the laws of the state where the loan was originated apply. If a borrower defaults, the lender must file his claim before the statute runs. Otherwise, the defendant can have the claim dismissed by proving that the statute of limitations bars the claim and any judgment against him.
How does a Statute of Limitation apply to Federal Student Loans?
Federal student loans such as the Perkins loan come with a guarantee; if the borrower defaults on the loan, the government makes good on the loss. In 2010, the federal government took over the job of extending loans directly. However, the many businesses and agencies that extended student loans before 2010 have loans on their books as well. There is no federal statute of limitations on these loans, and state statute of limitations doesn’t apply to loans with a federal guarantee.
Can the Statute of Limitations be Extended?
The rules regarding the statute of limitations on all consumer debt vary by state. In some states, the statute of limitation can be extended or waived if the borrower gives verbal consent that the debt is valid.
More frequently, the statute of limitations is often actually extended by making a payment. So, if you live in a state that has a statute of limitations of five years and you only make one payment in the fourth year, the clock starts again, and you will not hit your statute of limitations for another five years.
What happens when Student Loans are paid after a Statute of Limitations Has Passed?
So, your statute of limitations has passed, and you managed to avoid legal action. Should you just stop paying it and move on with your life? The answer is no. Though your lender can’t sue you, the debt is still yours to repay, and failure to do so will inevitably and significantly impact your credit as well as that of your cosigner if you have one.
As your creditworthiness declines, so does your ability to get a car loan, buy a house, or engage in any other type of financing arrangement, including personal loans. However, it’s worth mentioning that defaulted student loans will eventually fall off your credit scores, typically in seven years.
Where to Find the Statute of Limitations on your Loan?
Every student loan comes with a tremendous amount of fine print, and that’s likely where you’ll find the statute of limitations as it pertains to your loan.
If you can’t locate it there, you can inquire with your lender, though this may draw attention to your account, which can trigger legal protocols. Finally, if you’re currently working with a financial adviser, you can check with them. Of course, keep in mind that statutes are governed by state-specific laws, a review of which can also help you determine the date on which it passes.
What to Consider?
If you’re applying for a private student loan, it’s important to fully read and understand the loan agreement, and that includes noting the statute of limitations. Though waiting it out may sound tempting, doing so can have dire consequences for your personal finances, especially if the lender does invoke their right to sue you.
Furthermore, even if you successfully evade your lender, doing so will have a tremendously negative effect on your credit score, leaving you unable to access finances for a home, a car, or other purchases. You should make all efforts to pay your loan.
If you can’t manage your payments, work with your lender to determine a feasible repayment plan or consider loan consolidation and refinancing options if you’re struggling with your monthly payment.
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