How to Get Out of Default: What to Know Statutes of Limitations on Student Loans

If you have mounting student loan debt it could be tempting to ignore it. After all, what’s the worst thing that could happen? It turns out, a lot.

There’s no statute of limitations on federal student loans, so if you’re hoping your loans might disappear one day you’ll want to rethink that strategy.

Here’s what you need to know about how long you’re liable for your student loans, the consequences for not paying your debt and what your rights are.

Statute of limitations for federal student loans

“Though the government previously had six years to collect a defaulted federal student loan, the statute of limitations was eliminated by the Higher Education Technical Amendments of 1991. This frees holders of federal education loans to take collection actions,” said Jay Fleischman, a student loan lawyer who’s been representing borrowers for over 20 years.

Because federal student loan debt doesn’t time-out like other types of debt such as credit card debt, the government can withhold money from your tax refund or other federal payments such as Social Security payments. The withheld funds are then put toward your outstanding student loan balance if you stop paying. The government can also garnish your wages.

If you fail to pay your federal student loans and they’re transferred to a collection agency, you could also incur additional collections costs that you’re responsible for.

Know your rights

If your federal student loans are in default you have several government options to help you repair your financial situation.

• Loan rehabilitation: Through this program, your loan servicer determines a monthly payment by taking 15% of your discretionary income and dividing that by 12. Through rehabilitating your loan you can stop wage garnishment or other federal collections tactics. Although the record of the defaulted loan will be removed from your credit history, the late payments that were reported before your loan went into default will remain.
• Loan consolidation: To get out of federal student loan default you could also consider consolidating your loan into a Direct Consolidation Loan. To do so, you’ll either need to make three on-time payments toward your defaulted loan before you consolidate it, or agree to an income-driven repayment plan on your new loan.

Dealing with federal student loans in default can be confusing, and many people find it helpful to walk through the process with experts who are familiar with various options.

Where to find help

Getting out of default can be overwhelming but there are many organizations that specialize in helping people every day who are in similar situations. Here are a few places that offer help:

• Student Loan Planner. A Student Loan Planner® consultant can help you create a custom plan to get your federal student loans out of default and repay your debt. Consultants are experienced at knowing what strategies can help you experience financial freedom while also having student loans.
• Nonprofit credit counseling. Each state has specific guidelines that qualify regional credit counselors but you can find a state by state list of approved programs through the U.S. Trustee Program. You can also access resources provided by the National Foundation for Credit Counseling to start your process.
• Loan servicer: Often your loan servicer is able to be flexible with you to help you make a payment or partial payment on your loan. There could also be forbearance or deferment options to pursue if you fit the circumstances.

Statute of limitations on private student loan debt

The statute of limitations on private student loans is much different than the statute of limitations on student loans from the federal government. “Each state has its own rules for the applicable statute of limitations,” said Fleischman. “Some look to the law specified in the promissory note, whereas other courts use statute of limitations of the state in which the lawsuit is brought. Given the local nature of the issue, it’s best for people to contact a student loan lawyer in their area.”

In general, the statute of limitations is approximately seven years. This doesn’t necessarily mean that if you wait seven years the responsibility of your student loans will just disappear, however.

Time-barred debt

The statute of limitations on private student loans means they are considered time-barred debt, and your lender can’t sue you after the statute of limitations has passed. There is a large discrepancy over when the statute of limitations begins depending on your local laws, however, so you should research what the laws are in your state.

Let’s assume for the purposes of this example that you live in a state with a seven-year statute of limitations. Here are some common timeframes that determine when the statute begins:

• When you defaulted on your loan: If your state begins the statute when your first defaulted and you entered default in February 2020, your lender would have until February 2027 to sue you for payment.
• When you last made a payment: If the statute begins when you last made a payment and you made your last payment in February 2020, your lender would have until February 2027 to initiate legal action for failure to pay.
• Your first lapsed payment: A statute of limitations that is triggered by the first missed payment means that your lender would have seven years from the first time you failed to pay. So, if you made your last payment in February 2020, the statute would begin in March 2020 (the first payment you missed). Your lender would have seven years from March 2020 under this law.

Also, in many cases, making a payment restarts the statute of limitations. So, even if you make one payment on your loan after not paying for six years, that could restart the statute and give your lender another seven years (or whatever length the statute is in your area) to sue you.

As you can see, these small nuances can have a major impact on your financial situation, which is why it’s smart to work with an attorney who can properly advise you on the laws in your area.

Impact on credit

Even though your lender can’t sue you for non-payment after the statute of limitations has passed, this doesn’t mean the debt will vanish from your credit report. Negative credit events such as defaulted loans remain on your credit report for about seven years, which could impact your ability to buy a house, car, obtain insurance or do anything else that requires good credit.

How to deal with the statute of limitations on student loans?

Understanding your unique situation when it comes to the statute of limitations on student loans can often require researching the laws in your area and weighing these against your short- and long-term financial goals. Even though it can be a confusing process, there is a path out of student debt. Deciding on what that path is going to be for you could mean talking to experts about the nuances of your situation.

Get a Student Loan Plan