Can a lender collect on a student loan from 20 years ago?

Question:

When I graduated from college two decades ago, I had a few student loans. My parents told me that they paid off the loans as a graduation present. Now, I’m getting calls from a collection agency who says that the loans were never paid off. They say that I not only owe the debt, but also 20 years of interest, quadrupling the amount owed. Since my parents’ financial records are no longer available, I can’t find proof that the loans were paid off. Can they collect on this debt even though so much time has passed?

Answer:

The answer to this question depends on whether the loans are federal or private.

Statutes of limitation specify the maximum number of years after a loan goes into default during which the lender can sue to recover the debt. The defense of laches is based on the notion of “fairness” and is predicated on the notion that a debt should not be enforced due to unreasonable or negligent delay by the lender, for example, the debt cannot be collected if the lender failed to send a bill, statement or other demand for payment in a timely manner.

Federal student loans are not subject to a statute of limitations or the defense of laches. The Higher Education Technical Amendments of 1991 eliminated the statute of limitations and defense of laches on federal education loans, including existing loans.

Private student loans, however, are still subject to statutes of limitation and the defense of laches. The length of the statute of limitations varies from 3 to 15 years.  If the borrower makes a payment on his or her loans or otherwise acknowledges the debt as owed by the borrower, however, it can reset the clock, even if the statute of limitations has expired.

Most loan promissory notes require the borrower to notify the lender about changes in address. So, if the borrower moved and did not update his or her contact information with the lender, the defense of laches does not apply.

Debt collectors may contact a borrower about a debt whose statute of limitations has expired. They just can’t file a lawsuit to collect such “time-barred” debt.

If a borrower is served with notice of a lawsuit, it is up to the borrower to inform the court that the statute of limitations has expired on the debt. Otherwise, the lender might get a judgment against the borrower. In this instance, judgment may be enforceable even if the statute of limitations has expired. However, the borrower may be able to countersue under the Fair Debt Collection Practices Act.

If a borrower is contacted by a debt collector about an old debt, the borrower should ask for proof that the debt is outstanding, the amount owed and the date of the last payment.

Unfortunately, it can be difficult for borrowers to find documentation concerning a loan after so many years have passed. For example, the borrower’s parents may have paid off the debt in full, but the payment may have been applied to the wrong loans. Without documentation of the payment or a paid-in-full statement, it may be very difficult to prove that the loans were paid off.

Never throw away paperwork documenting that a loan has been paid in full, since old debts have a tendency to resurrect themselves. For example, borrowers who default on federal student loans may have their Social Security benefits and federal income tax refunds offset to repay the debt, many years after the borrower’s last payment. If the lender’s records don’t note that a private student loan has been paid off, the loan might be sold to a debt collector who then tries to collect the debt.