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Student Loan Law: 16.8.1 Introduction

Unlike the federal student loan programs, there is no comprehensive federal law requiring private student lenders to offer loan cancellations, deferments, forbearances, repayment terms, or similar relief. Private student loan borrowers are generally at the mercy of their creditors. There are some limited federal and state protections for borrowers and co-signers. Absent an applicable federal or state law, the borrower and co-signer’s rights are determined by the loan agreement and by the lender’s willingness on an individual, voluntary basis to offer relief.

Student Loan Law: 16.8.2 Deferments and Forbearances

Unlike federal student loans, there is no legal requirement that a lender offer payment deferment while the borrower is attending school. Nevertheless, private student loans traditionally have offered full deferment of payments during school, though interest continues to accrue during that period. Some private student loans do require in-school payment, although typically not payments including principal and accrued interest. Some payment plans require interest-only payments or a nominal fixed monthly sum (e.g., $25).

Student Loan Law: 16.8.3 Repayment Plans, Modifications, Settlements, and Refinancing

At least two state statutes regulate repayment plans on private student loans. Colorado and Maine require that if a private student loan lender makes a flexible repayment option available to one borrower, it must offer that to all borrowers. If it offers a repayment option other than a flexible one, it must offer the same plan to those with similar financial circumstances. These options must be disclosed on a publicly available website.326

Student Loan Law: 16.8.5 Removal of Default from the Consumer’s Credit Report

The Fair Credit Reporting Act provides a mechanism by which financial institutions that are private student loan lenders can offer an avenue for borrowers to rehabilitate their loans and remove defaults from their credit reports.341 If a lender chooses to participate in a loan rehabilitation program—and the consumer requests the removal of a reported default—the consumer must then make consecutive on-time monthly payments (the number to be determined by the financial institution).

Student Loan Law: 16.8.6.1 Death and Disability Cancellations

Unlike with federal student loans, the borrower’s estate and any co-signer typically remain obligated on a private student loan upon the borrower’s death, unless the loan agreement allows for such cancellation or the lender voluntarily waives that obligation. Likewise, both the borrower and co-signer remain liable when either the borrower or co-signer becomes permanently disabled.

Student Loan Law: 16.8.6.2.2 Student tuition recovery funds

Private student loan relief based on school misconduct may be available from state tuition recovery funds (STRFs), which are created and governed by state statutes.358 For example, if a school closes before a borrower is able to complete their education, the borrower may be eligible for partial or total relief on their private student loans depending on how the state law calculates relief. Relief may include refunds of payments made as well as the pay-off or cancellation of the outstanding balance.

Student Loan Law: 16.8.6.3.1 Terms of the Navient settlement

On January 13, 2022, thirty-nine state attorneys general announced that Navient, one of the nation’s largest originators of private student loans, will provide relief totaling approximately $1.71 billion to borrowers.362 The settlement will resolve allegations of Navient’s widespread abuses in its origination of predatory private student loans.

Student Loan Law: 16.9.2 Special Pleading Requirements; Limits on Default Judgments

A significant number of states have special pleading requirements for lawsuits seeking to collect consumer debt, and these should be applicable to collection lawsuits on private student loans. These pleading requirements are discussed in detail at NCLC’s Collection Actions.364 Note that some of these pleading requirements only apply where the plaintiff is a debt buyer.

Student Loan Law: 16.9.3 Infancy and Other Contract Defenses

Infancy is not available as a contract defense to federal student loan borrowers, but it is available for private student loans. The affirmative defense of infancy is well entrenched in the American legal system, but legislative actions by states have created exceptions that limit the availability and efficacy of the defense. In general, if a contract is signed by a minor, the minor can disaffirm the contract. However, an adult co-signer may continue to be liable on the contract.

Student Loan Law: 16.9.4.4 Computing the Limitations Period

When the applicable state’s limitations period has been identified, the next issue is computing whether the limitations period has expired, when the limitations period starts running, and whether the period has been tolled or revived. Although courts use varying terminology, the term “tolling” means the suspension of the running of the statute of limitations period, while “reviving” means restarting the running of the limitations period at zero days.

Student Loan Law: 16.9.5 Defenses for Servicemembers

The Servicemember Civil Relief Act (SCRA) limits collection tactics and enforcement of claims against active duty military personnel.432 In general, everyone on active duty is entitled to the benefit of the SCRA, whether or not they are stationed in a war zone and whether they enlisted or were called up. Active duty includes full-time training duty, annual training duty, and attendance at a military school while in active military service.433

Student Loan Law: 16.9.6.1 Generally

The plaintiffs in private student loan collection actions are not typically the original lenders, such as financial institutions or for-profit schools. The loans at issue have often been transferred, sometimes multiple times, to one or more other entities before the ownership of the loan is transferred to the plaintiff in a collection action.

Student Loan Law: 16.9.6.2 Business Entities Barred by State Law from Serving As Plaintiffs

State law may provide a basis to challenge a plaintiff’s right to serve as a named plaintiff in the state’s courts. With respect to trusts, some states, including Georgia and Louisiana, require that trustees, rather than the trusts themselves, serve as plaintiffs.442 Nevertheless, courts in both states have found that this does not apply to actions brought by a National Collegiate Student Loan Trust.

Student Loan Law: 16.9.6.5 Loan Holder As Real Party in Interest

To obtain a judgment, the plaintiff must establish that it is the real party in interest and has standing to sue.456 In other words, the plaintiff must show that it is the owner of the note or has the authority to sue on the actual owner’s behalf. Typically, state civil procedure rules require that actions be brought in the name of the real party in interest if standing to sue is to be conferred.457

Student Loan Law: 7.4.3.1 Generally

The rehabilitation process for FFEL Program loans and Direct Loans takes approximately a year from the borrower’s initial request for rehabilitation to the removal of the loan from default status—and the removal of the default notation from credit reports. Rules governing rehabilitation of Perkins Loans differ slightly and are addressed in § 7.4.5, infra.

Student Loan Law: 7.4.3.4 Requirement That Rehabilitation Payments Be Voluntary

The payments made under the rehabilitation agreement must be “voluntary.” This requirement excludes involuntary payments collected from the borrower by federal offset, garnishment, income or asset execution, or after a judgment has been entered on a loan.179 Garnishment or other involuntary payments will not count toward the nine required rehabilitation payments.180

Student Loan Law: 9.4.2.4.1 Overview of defenses and objections

The regulations allow borrowers to raise objections to garnishment concerning the existence, amount, or current enforceability of the debt,145 the rate of garnishment, and whether the borrower has been continuously employed less than twelve months after involuntary separation from employment.146 Borrowers may also raise eligibility for the statutory discharges, such as closed school and total and permanent disability.147 The borrower may also