Is There an Escape Hatch from Private Student Loans?
The general consensus is that student loans last forever – but that’s just not true. Of course, the optimal situation is that you take out no more debt than you can afford to repay, graduate, get a good job in your field and earn enough to pay your student loans. You then knock them out in 10 years (or less) and you’re done with them. But for many that’s not the way it goes and there are struggles that follow.
If you can’t afford to pay your student loans because you can’t get a job after school, can only get a minimum wage job or suffer from medical problems that aren’t bad enough to qualify you for a disability discharge but are bad enough to prevent you from working to your potential, you may find yourself in over your head!
Federal loans have more options…
For federal student loans, you have options. You can request Income Based Repayment or Pay As You Earn and qualify for payments as low as $0 and your loans will be considered in good standing so long as you continue to qualify. Then after 20-25 years, depending on the program, your remaining balances will be written off. Although this will trigger a tax event, if you’re broke, the IRS will likely work with you on a payment plan or a discounted payoff.
Private loans aren’t flexible…
But if you have a private student loan you can’t afford, you have far fewer alternatives. Depending on your lender and the terms and conditions of your loan, you may be eligible for forbearance that will get you some relief for a while. But unfortunately with private student loan debt, much like with any other unsecured consumer debt like credit cards, the bottom line is that they want their money and they really don’t care what they have to do to get you to pay up.
Debt collectors can be ruthless…
Although the Fair Debt Collection Practices Act sets out guidelines and legal limits for collections practices, as we’ve written before, debt collectors can be ruthless. They will threaten you with things they can’t do and will harass you ceaselessly if they think they can wring money out of you – even money you don’t have. They will tell you to borrow money from family and will encourage drastic steps that you shouldn’t take. Why? Because they get a cut of any money they can shake out of you.
Student loans can be wiped out in bankruptcy…
And you’ve likely heard that you can’t unload student loans in bankruptcy, but that is also largely untrue and in fact, it may be easier to get rid of private than federal loans in a chapter 7 bankruptcy. If you truly can’t afford to pay these loans and if you’ve got other debts accumulated, you may want to take this option. But there’s also one last thing to consider that you may not know – private student loans have a shelf life in the form of a statute of limitations (which federal loans don’t have).
Statutes of limitation are important…
The statute of limitations is important because once this is reached, collection efforts must legally cease and collection options available through the courts (including judgments and wage garnishments) are no longer available. Statutes vary by state – you can check yours on this chart – but this is important to know if you simply cannot pay your private student loans.
Statutes of limitation differ by state…
Private student loans fall under the category of “written contract” and range between 3-15 years with the average being 5-6 years. How does the statute come in to play? From the date you make the last payment, the clock starts ticking. What this means is that if you stop making payments (for whatever reason), the date of the last payment begins the statute tolling. In California, for instance, the statute is four years so if you never make a payment, the private loan taken out your freshman year will have expired for legal enforcement as you graduate. What this means is that for that loan, if you’re behind, while a collections agent may tell you they can garnish you or get a judgment, they can’t.
This statute limits collection options…
Once the statute expires on each private loan, collections options become limited for the lender. If they try to get a judgment, all you have to do is go into court, show the loan documents and ask that it be denied because the statute of limitations has expired. You can do this without a lawyer. It’s very straightforward.
Private loans expire from credit reports too…
The second important date is how long a private loan will stay on your credit report. Federal student loans stay there forever! But for private loans, that’s just not true. After seven years from the date of last activity, the credit reporting agency will have to take the loan off of your credit report. Some lenders will continue to update your file each month hoping they can push that seven year date out, but the rule of thumb is that “last activity” for an account that is unpaid is the date that it goes into delinquency and doesn’t recover.
To clarify, here are a couple of scenarios:
You, the borrower, live in Colorado where the statute of limitations is six years. You took out a private student loan on 1/5/2006. You make a few payments, but by 7/5/2007, you can no longer manage to make any payments because you can only work part time because you have lupus. Your loan goes into delinquency and then after 270 days of non-payment, your loan is considered to be in default. If you never make another payment on that loan here’s what should happen:
• As of 7/5/2013, legal options such as obtaining a judgment or garnishment expire.
• As of 3/31/2008, your loan is considered to be in default.
• As of 3/31/2015, your loan should fall off of your credit report.
Let’s stick with the same basic premise as scenario one, but with a few hiccups. You make payments, but miss many and eventually fall into default on 7/5/2007. You are able to rehabilitate your loan and resume payments as of 6/20/2008. But you lose your job on 10/20/2008 and can’t make any more payments. You go back into default as of 7/17/2009. If you don’t make any other payments, here’s what should happen:
• As of 10/20/2014, legal options such as obtaining a judgment or garnishment expire.
• As of 7/17/2009, your loan is considered to be in its final default.
• As of 7/17/2016, your loan should fall off of your credit report.
If you simply cannot afford to pay your private student loans and don’t expect your financial situation to recover, you may need to draw a line in the sand and decide whether it’s in your best interest to simply ride out the statute of limitations to eliminate legal collection efforts and then wait for the seven years to expire so the loan is expunged from your credit record. Of course, if you truly can afford to pay your loans, that’s what you should do but if you find yourself in worst-case scenario circumstances with your private student loans, at least you know it won’t last forever.
No matter your circumstances, sign up for Tuition.io’s free student loan management tool to keep track of all your loans – federal and private. Also sign up for our newsletter and be sure to check out our blog for tips on dealing with your debt. Our new student loan help center has a ton of information on student loan terminology and How To guides on applying for IBR, forbearance and a host of other topics.