Borrowers who have defaulted on their student loans can be sued by their lender to collect the debt. They may also be subject to garnishment of their wages and offset of income tax refunds. These borrowers need to understand whether and how the statute of limitations applies to their student loan debt. Otherwise, they may unintentionally reset the clock on time-barred debt.
What is a statute of limitations?
A statute of limitation limits the period of time during which lenders can take legal action against borrowers who have defaulted on their student loans. After the statute of limitations has passed, the student loans are considered to be time-barred debt.
Federal education loans, including the subsidized and unsubsidized Federal Stafford Loans, the Federal Grad PLUS Loans, the Federal Parent PLUS Loans and Federal Consolidation Loans, are not governed by a statute of limitations. The statute of limitations on federal education loans, which previously stood at six years, was repealed in 1991 as part of the Higher Education Technical Amendments of 1991. Since then, federal student loans have not be subject to a statute of limitations. This means the federal government, the lender in the case of federal student loans, is not constrained by a timeframe for legal action on unpaid debt.
Private student loans and private parent loans, on the other hand, are still subject to a statute of limitations.
The statute of limitations time period typically begins once a borrower stops making payments on a debt.
How does location affect the statute of limitations on student loan debt?
The duration of the statute of limitations on private student loans is determined by each state.
A six-year statute of limitations is the most common, but the statute of limitations can range from as few as three years to as many as 15 years.
The statute of limitations in each state will also vary depending on the type of contract. For example, Illinois has five-year statute of limitations on oral contracts and 10-year statute of limitations on written contracts.
But, which state’s statute of limitations applies to student loan debt? Is it the borrower’s state of residency? Is it the private lender’s location? What happens if the borrower moves and establishes residency in another state while still in debt?
Unfortunately, there is not a clear cut answer to those questions. In most cases, student loan debt is subject to the laws of the state where it originated. This means the debt is most likely governed by the laws of the borrower’s state of residency at the time of the loan agreement. For example, a student borrower must have reached the age of majority for the borrower’s state of legal residence to obtain a private student loan.
But, each state has different laws. A private lender may be able to take legal action against a borrower in the state in which the lender is based or in another state where the borrower has established legal residency after the initial loan agreement.
What is 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 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 vanish.
The time-barred debt can still negatively affect the borrowers’ credit scores. The statute of limitations also does not prevent lenders from trying to collect on the time-barred debt. Student loan debt may be sold to a debt collection company, which may contact borrowers to try to collect on the debt.
If time-barred student loan debt is sent to collections, the borrower does have options. First, it is helpful to obtain debt verification in writing from the debt collection agency. Second, borrowers may want to speak to a lawyer to understand their state’s laws and avoid mistakenly restarting the statute of limitations on their time-barred debt.
Avoid resetting the statute of limitations on time-barred debt
Borrowers should take care to avoid resetting the statute of limitations on time-barred debt.
If you reset the clock on time-barred debt, the debt loses its time-barred status and the holder of the debt can file a lawsuit to collect the debt. The statute of limitations clock resets to zero.
If a borrower makes a payment on time-barred student loan debt, even a “good faith” payment, it can enter a brand new statute of limitations period. Even an acknowledgment of the debt might rest the clock. Whether or not this happens is dependent on state law.
If the statute of limitations period is reset, borrowers are once again subject to potential legal action from lenders.