You still owe your student loan holders, even if the accounts have fallen off your credit report. If you have private loans, you may be outside your state’s statute of limitations, and thus protected from being sued by your creditors. But if they’re federal loans, that doesn’t apply.
Dear Keeping Score,I have a few student loans that were closed on my credit after years of nonpayment. I understand that the nature of them closing hurt my credit, but as soon as they closed my credit started to improve drastically. Now I have received contact from the original lender implying that they might reopen them. Can they do that and should I be worried that the debt is not actually gone? – Casey
There is a wealth of information out there about this subject, but for the purpose of answering your question I have to tell you that chances are very good that yes, your loans can be reopened, and yes you should be worried that the debt is not actually gone.
I can tell you for a fact that the debt is not gone and will never be gone until it is either paid off or discharged through bankruptcy or, in the case of federal student loans, forgiven.
I think you have a misunderstanding of what “closed” meant when your student loans disappeared from your credit reports. The accounts were not closed, at least not in the sense that I think you mean. They just dropped off your report due to the timing.
Your student loan debt is not actually gone, as you seem to think. It’s just not being reported at this point in time.
I can also understand why you might be confused about your defaulted or closed student loans. In some ways they are just like any other debt, but depending on the type of student loans you have defaulted on, they could be very different.
The answer to your question is further complicated by your state’s law dealing with the statute of limitations. Let’s look at your loan issues and then your credit issues, and then you’ll know where you stand.
Federal loan vs. private loan: How they differ
You don’t say if your loans are federal or private, and that makes a difference. If you aren’t sure, check out the National Student Loan Data System to get a list of your federal loans. If the loans aren’t listed in the NSLDS database, chances are they are private loans.
Federal loans become delinquent the first day after you miss a payment. Once delinquent, the loan remains delinquent until you make up the payment or come to an agreement. Some agreements include a loan deferment, forbearance or changed repayment plans.
Delinquencies are reported to the three major credit bureaus after 90 days. Unpaid federal student loans will remain on your credit report for seven and a half years from the date of your first delinquency. Your default could have some unique and unpleasant consequences beyond the usual credit damage.
A handful of states may suspend a driver’s license or professional license, and many schools withhold transcripts. If that’s not onerous enough, federal loans are not subject to a statute of limitations, meaning you can be pursued for their outstanding debt for an unlimited period, including having your tax refunds withheld and your Social Security reduced.
This also means that even after 30 or 40 years the federal government can sue you for payment. Lastly, it is extremely difficult – but not impossible – to have student loans discharged in bankruptcy proceedings.
Private loans are another matter, but the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made it much more difficult to discharge any student loan – private or federal – through bankruptcy.
Private loans that remain unpaid stay on your credit report for seven years from the date of delinquency.
They are also subject to your state’s statute of limitations for legal action against borrowers. The statute of limitations sets a time by which a collector can no longer take you to court to collect a debt.
In some consumer-friendly states, the time limit to sue to collect a debt is as little as three years, and in other more creditor-friendly states it can be up to 15 years. The statute only keeps you from being brought to court to collect the debt; it does not wipe out the debt. The debt is still valid and owed.
Credit score impact of missed student loan payments
Student loans impact your credit score for as long as they are negatively reported. They will have a negative impact on your payment history (35 percent of FICO, 40 percent of VantageScore) and amounts owed (30 percent of FICO, 20 percent and 11 percent for VantageScore) categories.
The impact on your payment history may be much worse than for a typical debt as many students receive a separate loan for each semester or enrollment period. While you may only have to make one payment monthly, each individual loan will appear on your credit report and count against you. In your case, once the loans were no longer being reported as delinquent, your score would definitely go up as you saw happen.
If we were talking about something like a credit card delinquency (which also remains on your credit report for seven years), after that amount of time (and depending on your state’s laws), chances are that the debt would become uncollectable due to the statute of limitations.
Don’t ignore your old debts, despite the statute of limitations
This statute is, as I said, determined by the state in which you live and once that limit has been reached you can no longer be sued for payment of the debt. One of the reasons you are hearing from your creditor now may be that your loan is approaching the limitations date. Depending on your state’s law, you may restart the statute of limitations clock if you make any payment or enter into an agreement to repay the debt.
Again, not knowing what type of loan you have makes it more difficult to offer you more specific suggestions. What I can tell you without hesitation, however, is that ignoring the problem is not going to make it go away and will likely make it worse.
I suggest you find out what your options are and make a plan to address any unresolved issues with your loans. A good place to start is the U.S. Department of Education’s Office of Federal Student Aid. Even if you have private loans, there is information on this site to get you started. I hope you will check it out, because not doing anything is really not a good option.
Another excellent resource is the National Foundation For Credit Counseling. They offer free or affordable budgeting help as well as expert advice on student loan debt.
Remember to keep track of your score!