Our goal at Credible Operations, Inc., NMLS Number 1681276, hereafter referred to as “Credible”, is to give you the tools and confidence you need to improve your finances. Although we promote the products of our partner lenders who pay us for our services, all opinions are our own.
If you don’t make your payments on your private student loans, you may be considered in default – and your lender may be able to sue you for payment. But their window to take legal action is limited.
If your lender waits too long, they lose the ability to sue. This concept is called a limitation period.
Let’s see how the statute of limitations works when it comes to private student loans and what you need to know about it.
What is the statute of limitations for private student loans?
Each state has its own guidelines for private student loan statute of limitations. They are usually between three and six years, although some states may have longer deadlines. This means that a lender usually has three to six years after you default on your private student loan to pursue you for payment.
Since the statute of limitations often measures the time since your last loan payment, you can “restart the clock” by making a payment, even a partial payment. In other cases, the period begins when you default.
It is important to know that federal student loans are unlimited and the government can ask for a refund at any time.
HOW TO DECIDE WHICH STUDENT LOANS TO PAY FIRST
What happens when the limitation period expires?
When your state’s statute of limitations expires, your lender can no longer successfully sue you for repayment of your loan. That doesn’t mean you can’t be sued, though.
If your lender decides to sue you, you will need to go to court and use the expiration of the statute of limitations as a defense. If you do not come forward and raise this defence, a judge can enter judgment against you.
Are private student loans canceled after 20 years?
No, private student loans are generally not canceled after a certain period of time. Federal student loans may become eligible for forgiveness if you work in the public service or spend 20 years on an income-based repayment plan. Private student loans generally do not have such provisions.
When does the limitation period start?
You risk being sued for non-payment of your private student loans as soon as you miss a payment. This is different from federal loans, which generally require you to be at least 270 days (9 months) past due before defaulting. But some private lenders wait until you miss at least three monthly payments before declaring you in default on your loan.
In some states, the statute of limitations begins the day you default on your loans. In other states, it is measured from the date you made your last payment. This date begins the (usually) three to six year period after which you cannot be successfully sued for payment.
What happens if you fail to repay your student loans?
Defaulting on private student loans begins a long process that can have devastating effects on your credit score and finances.
You can be considered in default as soon as you miss a monthly payment, or after three consecutive missed payments, depending on your private lender’s policy. At this point, the lender will usually report your default to the credit bureaus, which will lower your credit score. Your lender can then request payment directly or send your debt to a collection agency to attempt to collect payment. Your lender can also sue you for a judgment forcing you to pay your debt.
During this time, you may be able to negotiate with your lender or their collection agency a payment plan to get you back on track with your loan.
Can you get out of your student loans through bankruptcy?
Getting rid of a private student loan through bankruptcy is often difficult, but it can be done. In general, bankruptcy proceedings do not cancel student loans. But you may be able to have your loans canceled if you can prove that the loan causes you “undue hardship”. You will have to go through additional legal steps during bankruptcy to prove it, and a judge will have to rule in your favor.
In limited circumstances, private student loans can be discharged in bankruptcy without this extra step. This can include when loans were given directly to you, rather than your school, or when you took out your loans to attend an unaccredited college or university. A lawyer may be able to help you determine the best course of action.
Can wages be garnished for private student loans?
Yes, your wages can be garnished to pay off your private student loans. Wage garnishment occurs when the courts order your employer to withhold part of your paycheck and send the money directly to your creditors.
Your lender will usually need a court order to start garnishing your wages. Under federal law, the amount that can be seized depends on your income and disposable income. Your wages can be garnished until the debt is fully paid. State laws generally dictate how garnishment works.
With private student loans, a lender cannot garnish Social Security benefits or federal tax refunds to collect payment.
WHEN IS THE BEST TIME TO REFINANCE YOUR STUDENT LOANS?
Refinancing your student loans can save you money in the long run
If you are having trouble repay your private student loandefaulting and hoping to make it through the statute of limitations is not a wise course of action.
A better plan is to get in touch with your lender. Let them know how much you can afford each month and see if your lender will work with you. You can also ask for a modified or extended payment plan or a temporary forbearance of your payments until you can get a stronger financial footing.
You can also consider refinance your private student loans to reduce your monthly payment. When you refinance a private student loan, you take out a new loan that is amortized and replaces the one you currently have. You may also be able to consolidate multiple student loans into one loan by refinancing, leaving you with one monthly payment.
Depending on your credit score, you may qualify for a lower interest rate than you currently have on your loans. In this case, refinancing at a lower interest rate can lower your monthly payment and make it easier for you to make your payments.
But keep in mind that you may incur additional charges costs when refinancing student loans, such as assembly costs. It can also be difficult to refinance student loans with bad credit. And, you may not want to refinance your federal student loans into a private loan. This causes you to lose the benefits of federal student loans, such as income-based repayment plans and eligibility for remission.
Before refinancing your student loans, take an inventory of the loans you currently have, both federal and private. Write down the amounts and interest rates for each loan. A student loan refinance calculator may be able to help you determine how much you can save through refinancing.
Credible, it’s easy to view your personalized student loan refinance rates from multiple lenders in minutes. And it doesn’t affect your credit score.