Student loans continue to be a significant burden on most college graduates. And for those who take out private loans, the financial implications can be much more dire. Private student loans usually come with much higher interest rates than federal loans and far fewer protections. While private student loans still represent a relatively small percentage of overall student debt, the collection tactics on private educational debt may be much harsher than on federal loans. But you can fight back. Here's what you need to know.
Exhaust federal loans first
If you've already graduated with private student loan debt, this piece of advice is too late for you. However, if you're still in college, know this: most private student loan borrowers had not exhausted more affordable federal loans before they moved on to private funding. According to data from The Institute for College Access & Success (TICAS), nearly half of all borrowers still had federal loan availability that would have been cheaper to utilize. It's wise to max out federal loans first.
Know the limitations of debt collectors
Before you respond to a debt collection effort on a private student loan, you should understand your rights. Unlike a federal student loan, private student loans have a statute of limitations just like credit cards and medical bills. In North Carolina, the statute of limitations for debt enforceability is three years. What this means is three years after the most recent activity on that debt, the legal ability to enforce it expires.
For instance, if you take out a private student loan in January 2005, make payments on it beginning January 2009, then stop making payments in January 2012, the statute of limitations would start tolling as of the date of your last payment. However, if you make any payment, even a $1 payment at any time after that, the statute of limitations will reset. So, if your debt is close to hitting the three-year mark, it's wise to NOT make a payment and allow the debt to expire.
Know who can collect on your debt
In addition to the time limitations on private student debt, there are limitations on who can collect on it. If your original lender contacts you, they do have the right to collect on that debt. However, if you are contacted by a third party, they may or may not have the legal right to collect on the debt. National Collegiate Student Loan Trust is one organization that collects on delinquent private student loan debt.
Trusts like this one purchase large pools of student loans, much like investment tools that purchased large groups of mortgages back in the heyday of the mortgage disaster. These trusts collect on student loans and aggressively pursue borrowers that don't pay up usually through lawsuits. If you are notified that you're being sued over your private student loan by a trust like this, there are some steps you can take.
Always respond to debt lawsuits
You should definitely respond to the lawsuit and may want to seek attorney advice to help. However, the two primary defenses you can use to fight back are: (1) the statute of limitations has expired and/or (2) the trust does not properly own the loan and thus cannot collect. Student debtors have been very successful in pushing back on this latter point because the trusts cannot prove they have the legal right to collect on the debt. The former is much more straightforward, particularly if you maintained complete records that show precisely when your last payment was made.
The worst thing you can do, in the case of any creditor lawsuit, is to fail to respond. If you don't reply to a lawsuit, the court will automatically side with the creditor and issue a summary judgment that is much harder for you to fight after the fact. Creditor litigation for medical bills and credit card debt is much easier to deal with and can be stopped permanently by a Chapter 7 bankruptcy.
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