Before you decide to borrow student loans, make sure you know of the various rights that you have, the methods that can be used to collect your debt after the due date, the legal action that can be taken by the government and lender if you default on your loans and how the statute of limitations can play a major part in this.
Statute of Limitations is the duration in which someone can make a legal claim or file a case in court. These are set by law and the duration can differ based on the subject matter. This duration is present when charging someone with a crime, suing someone for breaking the terms of a contract, going after someone for recovering an injury caused, and more
If the lawsuit is filed or you are sued after the statute of limitations has passed, then you can remove the claim and they won’t be able to go forward with the case.
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Statute of Limitations for student loans
A statute of limitations for student loans is the period of time in which the lenders can make a legal claim or file a lawsuit against you for your defaulted student loans. After exceeding this period, the student loans are called as 'time-barred debt'.
It means that the lender waited for too long to take any action and this can be taken as an advantage to the borrower where he/she can take up a legal defense and get the lawsuit released and the debt can’t be collected. Though they can’t sue you, they can still try to collect your debts through a collection agency, failing so would lead to the decline on your credit score making it harder for you to acquire loans in the future.
[Also Read: Student loan lawsuits ]
There are a number of factors to take into consideration when trying to understand the statute of limitations on student loans like the length of the period, type, status and the history of the loan, different laws like the federal and state law, and more..
Statute of Limitations on Federal Student Loans
In accordance with the Federal Law, there is no statute of limitations when collecting federal loan debts, which means that there is no expiration on these loans and they do not become uncollectible even after many years of not taking any action by the lender.
They can anytime approach the borrowers for the rest of their lives. Even then, if you’ve defaulted on a loan make sure to attend to it rather than ignoring the problem and hope it goes away.
Federal student loans include Subsidized and Unsubsidized Federal Stafford Loans, Federal Grad PLUS Loans, Federal Parent PLUS Loans, and Federal Consolidation loans.
Statute of Limitations on Private Loans
There is a statute of limitations on most private loans, though the time period differs as they are determined by state laws and state laws have different limitation periods.
In some cases, there can also be more than one state involved. Suppose you are residing in one state and you get sued on another state. It leads to a conflict between the different states limitation period, and a judge will have a say on the final period that would apply.
Depending on the type of contract - oral and written contracts, the statute of limitations also differs. For example, Alabama has 3 years statute of limitations on oral contracts and 6 years on written contracts.
Types of Contracts
As described above, the statute of limitations on the collection of debt differs depending upon the different states. It also depends upon the types of contract in which the borrower and lender entered into.
1 - Oral Contracts, also known as 'open-ended accounts' or 'contracts not in writing', is a contract between the lender and the borrower where they come to a discussion-based agreement about lending money and paying it back. The terms under this contract are usually difficult to enforce and can be hard to go for legal action if anything goes wrong. So witnesses have to be present when two parties come into an oral contract.
This contract is most likely used for credit card debt as they are open-ended agreements. But, because a number of states tend to break this rule, then it is possible that some states will put credit cards under a written contract.
2 - Written Contract is an agreement in writing between the lender and borrower which has to be signed by both the parties. The signature signifies that both parties have agreed to the terms and conditions and conform to their responsibilities.
There are closed contracts and in financial terms, they are usually loans. So, if you’ve taken a loan and want more money, you can’t increase the amount but you have to take another loan.
One important thing to know about written contracts is that if they are signed under a seal, then they are classified in a separate category. It takes longer for these written contracts signed under a seal to become time-barred debt.
When does the Statute of Limitations period on student loans start?
When a loan goes into default, then the statute of limitations period also starts, although it can differ from one state to another. But certain situations might put this period on hold like going abroad or bankruptcy, in certain states.
Other actions like admitting about the debt in writing or a promise to pay after the period have passed can restart the time and extend your statute of limitations period. Also, if you make a payment on a debt that is due since before, even if you are months, weeks or even days away from your debt being time-barred, then again your limitation period will start from the beginning. This will remove the 'time-barred' status from your debts and allow the lender to sue you.
For example, You stop paying your private student loan debts in 2012 which has a 3 years statute of limitations period, then the period will start from that year and end till 2015. But if you make any payments in between, say in 2014 then your period will start again and end till 2017.
[Also Read: Student loan debt management and statistics ]
So when the lenders try to approach you on the collection of your time-barred debts, make sure to talk to your lawyer about it to understand the state’s law that is to be applied in order to avoid restarting the clock on the statute of limitations period.
Credit Reporting Time Limit and Statute of Limitations
Borrowers usually confuse the period in which your debts are recorded in your credit report with the Statute of Limitations period. But the two differ from each other.
Credit Reporting time limit is the duration in which the negative items and information stay in your credit report. The Federal Law says that this negative reporting of credit, in most cases, have to drop off the borrower’s credit report after 7 years. This period will start on your first delinquent or default loan.
Suppose you have a defaulted loan in 2011, so the reporting about this default to the credit bureaus will continue up to 2018.
It is important to know that the credit reporting period has nothing to do with the statute of limitations period and for collection of debt. Suppose you have a default federal student loan for more than 7 years, so it will stop showing up on your credit report. But since federal loans are not subjected to a statute of limitations, then it means the debt is still active and can be collected.
[Also read: What are default and delinquency? ]
In the same way, if you have a default private student loan for more than 7 years but the statute of limitations in your state is longer than that or if you did something, like making payments for the previous debt in between, which caused it to restart, then your debt is still collectible even though it is no longer recorded on your credit report.
State-wise Statute of Limitations on Student Loans
The following table shows the different limitation periods of the statute of limitations based on the states and type of contract-
|States||Limitation Periods (Years)||Limitation Periods (Years)|
|Oral Contracts||Written Contracts|
|Indiana||6||6 or 10*|
|Kentucky||5||10 or 15**|
*Written Contracts carried out between 19th September 1881 and 1st September 1982 are time-barred after 10 years and contracts executed after 1st September 1982 after 6 years.
**Written Contracts carried out after 15th July 2014 are time-barred after 10 years and those executed on or before 15th July 2014 after 15 years.
If you have a private student loan, then it is important to know the various terms and conditions that come with it. The Statute of Limitations must be understood properly based on the state in which you’re currently residing in.
While it must sound good to stop paying your loans and try taking advantage of this period, one should also understand that it comes with consequences. Defaulting a loan will not only ruin your credit score which will make it harder for you to be eligible for other loans, but will also make the repayment of your loans costlier the longer you wait.
Also, just because you took advantage of the statute of limitations period and managed to get a lawsuit against you dismissed, it doesn’t mean that you don’t have to repay your debts.
If you are having financial troubles and can’t manage to make your payments on time, make sure to talk to your lender about it and enroll in a repayment plan that will benefit you. You can also consider consolidation or refinancing of your student loans.
Where to find the Statute of Limitations on your loan?
You can find it in the contract of your loan under the terms and conditions. If you can’t find it, you can inquire about it with your lender or your financial adviser, if you have one. Also, keep in mind that the limitations are based on state laws, so try to find out about it.
Is there a statute of limitations on Federal student loans?
No, as per the Federal Law, Federal student loans are not subjected to Statute of Limitations and the lender can take as much time as they want to file a lawsuit against the defaulting federal loans.
Do student loans go away after 7 years?
No, 7 years is the standard time in which the negative information, like defaulting a loan will be recorded on your credit report. After 7 years the information will not be reported anymore but it doesn’t mean that your loans are discharged.
The loan is still active and you might be called anytime by the lender or debt collection agency.
Do student loans ever expire?
Federal loans do not expire but private loans have a statute of limitations which is the period in which the lender can make a legal claim against your default loan. If the lender sues you after the period has passed, then you can take a legal defense in court and get a release from the lawsuit and make your debts uncollectible.
However, you are still liable to pay your debts if the lenders try to collect it through other collection agencies.
Is the statute of limitations a valid defense to a student loan lawsuit?
If the lawsuit is filed after the passing of the statute of limitations period, then the borrower can take a legal defense in court to dismiss the lawsuit.
Are the Statute of Limitations period and credit reporting time limit the same?
No, the credit reporting time period is the duration in which the negative information is being reported in the credit report, whereas the statute of limitations period is the time period in which the lender can make a legal claim or file a lawsuit against a borrower defaulting on their loans.
What shows on a Credit Report?
Federal and private loans acquired by the borrower along with the reporting of debt (trade line) for each loan is shown on the credit report. The trade line includes information like the loan’s payment history, origination date, outstanding balance, date last reported and company reporting.
How long is a debt reported?
The debts which are in good standing will continue to be reported until closed or defaulted by the servicer or lender every month. Closed or defaulted loans will not be reported which is known as \'aging off\' or \'fall off \' the report, in most cases after 7 years.
Can a debt reappear?
If a loan is no more in default, then its trade line will also reappear in the credit report if it had \'aged-off\'. At this point, no negative items will be reported and the loans will be in good standing.
Do we need to monitor our credit?
Yes, it is necessary to monitor your credit, especially before making major purchases. The score is not as important as the accuracy of the information being reported. So make sure all the information reported is true and real.