Most types of debt, aside from child support and taxes, are subject to a statute of limitations, typically ranging from three to six years, and in some cases up to fifteen years dating from the last activity on the account in question. This means that while the debt does not disappear, creditors are prevented from winning a judgment against the debtor in court in order to collect after that period.
Before 1991, this was the case with federal student loan debt. However, legislation that year instituted a draconian new policy under which federal student loan debt had no statute of limitations at all. In fact, even loans issued while there was a statute of limitations are now eligible for collection.
This makes student loans a particularly pernicious form of “zombie debt” — debt resurrected long after the debtor would have had good reason to believe it had been laid to rest.
Taking advantage of this, debt collection agencies have begun pursuing student loan debts that are decades old. Some of these loans have even been paid in full; the borrowers just can’t prove it, having discarded their paperwork years ago.
The End of the Statute of Limitations
The statute of limitations on collection of federal student loans was once a reasonable six years. All of that changed under the George H.W. Bush administration.
Legislators moved to tighten up loopholes in response to lawsuits such as Grider v. Cavazos (1989), which saw two defendants argue that tax refund offsets against their student loans were invalidated by a ten year statute of limitations under Treasury Department regulations.
In March of the next year, Representative William D. Ford of Michigan introduced the Higher Education Technical Amendments. They were soon passed as part of the Higher Education Technical Amendments of 1991. A further amendment in 1992 made the legislation retroactive — that is, collections could proceed even on loans taken out prior to its passage.
Under the stipulations in the amendments, there was no longer any statute of limitations on federal education loans. The wording took pains to cast a wide net, stating that repayment was obligatory “without regard to any Federal or State statutory, regulatory, or administrative limitation on the period within which debts may be enforced.”
Private student loans, however, remained time-barred and were subject to state-level statutes of limitations, though those could be ambiguous depending on the borrower’s state of residency, the state in which they attended college, and the state in which the lender was located.
Defaulting on them is nonetheless inadvisable due to the long-lasting damage it can do to the borrower’s credit score — defaulted loans remain a factor in determining credit scores for seven years. Further, any action on the account, including “good faith payments” or acknowledging responsibility for the debt can reset the statute of limitations.
Raising the Dead
Debt collectors wasted no time in availing themselves of their newly broadened authority. And borrowers began challenging it, to little avail.
One 1991 district court case (United States v. Friedenberg) heard before the 1992 amendment that specifically made the provisions retroactive, found that the legislation was not retroactive to 1979, when the plaintiff had taken out a loan. However, ensuing cases, presumably strengthened by the 1992 legislation, dismissed the reasoning of the decision in the Friedenberg case.
The Debt Collection Improvement Act of 1996 further widened the categories of income that could be garnished or offset to repay defaulted debt to Social Security payments. Also eligible for garnishment and offset are wages and income tax refunds. A 2005 Supreme Court case, Lockhart v. United States, upheld the offset of Social Security benefits in a student loan case despite the fact that the borrower had taken them out between 1984 and 1989.
With precedents like these demonstrating the vast scope of possible debts that could potentially be collected by collection agencies, it’s no wonder that more and more people are receiving collection notices for loans long since forgotten.
No Recourse to the Defense of Laches
Some debtors have attempted to circumvent these ironclad rules by resorting to the defense of laches. This equity principle asserts that claimants — in this case, lenders — must pursue their claims in a timely fashion. Thus, under this principle, bringing a claim for a debt that was decades old would have no merit.
With few exceptions, under the 1991 and 1992 amendments, this is not the case. While a 1992 district court case (United States v. Rhodes) found in favor of the debtor, who took out his loans in 1973, most cases mirrored another district court case the following year.
In United States v. Robbins, the defendant argued that laches prevented the government from collecting on loans taken out in 1980. She was compelled to pay by the decision, which reinforced the commonly held notion that the government was not subject to the defense of laches and asserted that the 1991 and 1992 legislation was sweeping enough to include laches in any case.
Keep Your Paperwork
Even in cases where borrowers have paid off their debt or never really had any debt in the first place, lenders and collection agencies may pursue payment because they have no verification that the debt was retired.
Because debt collectors do not always receive complete records from the original holders of the loans, they may be justified in their belief that there is a valid debt to be collected. And, in the absence of definitive records held by the borrower, it can be extremely difficult to prove that the loans were paid off or settled.
Desperate posters contact student loan forums regularly with stories of having paid their debt off, sometimes through non-traditional means, such as default judgments that might not have been included in the paperwork transferred to a guarantor. The debtors struggle to prove that the debt no longer exists when they are contacted with collections notices.
In a Brigham Young University Journal of Public Law article entitled “Eternal Student Loan Liability: Who Can Sue Under 20 U.S.C. § 1091a?” the author cites the case of a woman who took out a student loan to attend beauty school in 1987, but never used the funds due to a multiple sclerosis diagnosis. Though she cancelled the loan, in 2004, collectors came calling and she had difficulty proving that she had never used the funds.
So, too, even valid debt may balloon well beyond its original proportions due to compound interest. In one frequently cited case reported to a web forum, a septuagenarian grandmother had defaulted on a $3,500 loan.
In the midst of caring for her grandchildren, and enduring a health crisis of her own, she ultimately forgot about it until a decade later, when a collections bill for some $20,000 arrived on her doorstep, along with a notice about the impending offset of her Social Security benefit, upon which she relied.
Student loan debtors are encouraged to keep all of their paperwork indefinitely. Particularly important are payment histories, cancellation notices, and paid-in-full notices. Those who are suddenly beset by zombie debt should send a debt verification letter demanding the history of the loan, the original amount in which it was issued, and the supposed outstanding amount.
Debtors should check to be sure that their loans are actually paid off by examining their records in the National Student Loan Data System (NSLDS).
Under the Fair Credit Reporting Act (FCRA), subjects of such collections efforts may also request review of the debt’s validity if it appears on their credit report. If the reporting creditor cannot verify the charges, the debt must be removed from the credit report.
Borrowers are also entitled under the Fair Debt Collection Practices Act (FDCPA) to ask for verification of the debt.
A Case for a Statute of Limitations?
Though many of the borrowers pursued by zombie student loan debt clearly made errors in judgment and failed to meet their financial obligations, many observers find the collection methods allowed for under the current legislation to be heavy-handed. It can be very difficult to prove that a loan was never borrowed by you or that it was paid off decades ago.
Given that even massive credit card debt falls under a statute of limitations, why shouldn’t student loan debt as well?
Opponents of any relaxation of the rules point to what they see as a probable increase in default, already a growing problem. Per their reasoning, some debtors might be willing to ride out the heavy hits to their credit scores until the debt was uncollectible. They needn’t fear in the near term at least. No relief for debtors hoping to evade their debt by waiting it out is currently on the horizon.