Written by Jacob Maslow, founder and editor of Legal Scoops
Question: I am freelancing online. If I ignore my student loan, what could they possibly do to me?
Answer: This thought must have gone through every student’s mind at some stage. It is natural to look for an easy way out, when burdened with lots of debt. Defaulting on student loans usually makes a bad situation worse. Private loans however have a statute of limitations, so they cannot take legal action against you once this statute is up.
Defaulting on any loan is risky business, as the repayments accumulate and your credit score will be damaged. However, when the statute of limitation expires, lenders cannot force you to pay. Collection agents may hassle you, but they will not succeed if it goes to court.
The statute of limitations varies depending on your state, beginning from the date of your last payment. It will reset if you make any subsequent payments or even acknowledge the debt is yours in some cases. Time periods can range from three to ten years, depending on your private lender and location. College grads may appear carefree, but you will feel the sting of a bad credit rating in your late twenties. These laws are a grey area, so debt collectors will try every tactic they can to reset the statute, look for loopholes, or get you to pay up. You may need a lawyer to help explain a complex situation.
Private student loan debt is eventually removed from your credit record, but it takes seven years. From then on, you can rebuild your credit score. During those seven long years, your low credit score will hamper your ability to get a mortgage, auto loan, and apartment rental in some cases.
The longer you avoid paying the larger your debt grows due to compound interest, which is interest on interest. Your original lender may sell your debt to a third-party debt collector. These agents may be more aggressive with their collection approach. They may contact family members or even your work colleagues or manager. However, you do have some legal rights and protection from hostile debt collectors.
You absolutely can be sued for unpaid debts before the statute of limitation runs out, and some lenders actively summon borrowers to court. In this instance, you will need to pay a financial attorney. If you lose the court case, you will have to start repaying. Refusal after a court decision could result in debt collectors taking payments directly from your wages or bank account.
If your situation is that bad, there is the possibility of discharging private student loans through bankruptcy. Consolidation or refinancing loans are other options to bring the payments down.
I had three jobs in college. The best day of my life was when I paid off my student loans, on my own… Jessica Seinfeld.