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Do You Have to Pay FAFSA Back?

If you’re wondering “do you have to pay back FAFSA® loans?,” what you really want to know is whether you have to pay back your federal student loans that you may be eligible for after filling out your FAFSA. In short, you will have to pay back loans you get through completing the Free Application for Federal Student Aid (FAFSA®), but other types of student aid you get through FAFSA likely don’t need to be repaid.

Aside from federal student loans, you can also use FAFSA to apply for grants and scholarships as well as work-study jobs, for which you’d get funds you usually wouldn’t need to pay back. If you have loans through FAFSA and need to pay them back though, read on for information on the three general types of federal student loans and your repayment options.

Direct Subsidized Loans

With Direct Subsidized Loans, the government (more specifically, the U.S. Department of Education) pays the interest while you are still in school at least half-time. That’s what makes them “subsidized.”

The maximum amount you can borrow depends on whether you are a dependent or an independent student, as well as what year of school you are in. However, it is ultimately up to your school how much you are eligible to receive each academic year.

Not everybody qualifies for a subsidized loan. You have to be an undergraduate (not a graduate student) demonstrating financial need and attending a school that participates in the Direct Loan Program. Additionally, the academic program in which you are enrolled must lead to a degree or certificate.

You also should check how your school defines the term “half-time,” as the meaning can vary from school to school. Contact your student aid office to make sure your definition and your school’s match completely. The status is usually based on the number of hours and/or credits in which you are enrolled.

Direct Unsubsidized Loans

You will have to pay back all the interest that accrues with Direct Unsubsidized Loans, because these loans are “unsubsidized.” That means the government doesn’t cover your interest while you’re in school like they do with a subsidized loan.

You do not have to prove a financial need in order to qualify for a Direct Unsubsidized Loan. Additionally, these loans are available to graduate students as well as undergraduate students. Again, you need to be enrolled at least half-time in a school that will award a degree or certificate.

Direct PLUS Loans

There are two types of Direct PLUS Loans:

•   Grad PLUS Loans: These are for graduate or professional degree students

•   Parent PLUS Loans: Parent PLUS Loans can be taken out by parents for as long as their qualifying child is a dependent or undergraduate student

Unlike most other loans, PLUS loans require a credit check, and you cannot have an adverse credit history . If you or your parents have bad credit, a cosigner on the loan application may be an option.

With Direct PLUS Loans, you can borrow as much as you need (subtracting the other financial aid you’re getting). However, the interest rate for PLUS loans is generally higher than it is for the other types of federal student loans.

Do I Get a Grace Period on My Federal Student Loan Repayment?

Whether you get a grace period — time after you graduate (or drop below half-time enrollment) during which you do not have to make loan payments — depends on what type of federal student loan you have, as not all federal student loans offer one. Direct Subsidized and Unsubsidized Loans offer a grace period of six months, whereas Direct PLUS loans don’t offer a grace period at all.

Grace periods are meant to give you time to find a job and organize your finances before you have to start making loan payments. They are usually one-time deals; in most cases, you often can’t get a second grace period ​once the initial one ends.

Additionally, not all grace periods are exactly alike. Different loans may offer different grace periods. Policies vary. Check with your loan servicer so that you know for sure when your grace period begins and ends.

Keep in mind that grace periods are usually not interest-free. Some loans accrue interest during grace periods, which means that the interest will “capitalize,” or be added to the principal when the grace period ends. Many students subscribe to the strategy of making interest payments even during the grace period. Doing this can ultimately lower the amount you owe, and interest payments are generally more affordable to handle than principal payments.

Also remember that loan servicers are paid by the Department of Education to handle billing and other services for federal loans. The government gives you a loan servicer; you don’t get to choose one yourself. The loan servicer you get is the one you should contact if you have questions regarding your loan.

Federal Student Loan Standard Repayment Plan

Once you graduate, your repayment plan will depend on various factors, but most of the time the government will place you on its Standard Repayment Plan . The general rule here is that you’re expected to pay off your loan over the course of a decade, and your payments will remain the same for the duration.

Before you are placed on that Standard Repayment Plan, the government gives you a chance to choose a few other repayment options (which we’ll discuss below). If you don’t choose one of those, you’ll automatically be placed on the Standard Repayment Plan.

Additional Repayment Options

Here are a couple of your other repayment options beyond the Standard Repayment Plan:

•   The Extended Repayment Plan: The Extended Repayment Plan can extend your term from the standard 10 years to up to 25 years. To qualify, you must have at least $30,000 in outstanding Direct Loans. As a result, your monthly payments are reduced, but you could be paying way more interest.

•   The Graduated Repayment Plan: Another option, the Graduated Repayment Plan lets you pay off your loan within 10 years, but instead of a fixed payment, your payments start low and increase over time. This may be a good option if your income is currently low but you expect it to increase over time.

Keep in mind that although you can choose these repayment options, you cannot refinance a federal student loan with the government on your own (you can, however, consolidate them). That’s because those interest rates are set by federal law , and they can’t be changed or renegotiated.

Difference Between Refinancing & Consolidating Student Loans

While you can’t refinance your federal loans with the government, you can do so with a private loan company. Before you consider refinancing, be sure to know the difference between refinancing and consolidating student loans:

•   Refinancing means taking out a brand new loan so that you can pay off your existing loans. To refinance, you’ll choose the loan company you feel is best, with (hopefully) better interest rates and repayment terms. Refinancing can be done via a private lender and can be used for both federal and private loans. Keep in mind that when you refinance federal loans with a private lender, you lose access to federal benefits and protections like loan forgiveness programs and repayment plans.

•   Consolidation means placing all of your current loans into one big loan. Doing this typically extends your loan term so that your monthly payment is lowered. The problem with consolidating student loans is that it could mean you wind up paying additional interest. This is because when you consolidate multiple federal student loans, you’re given a new, fixed interest rate that’s the weighted average of the rates from the loans being consolidated.

Refinancing (as opposed to consolidating) your school loans may be a good option if you have high-interest, unsubsidized Direct Loans, Graduate PLUS loans, and/or private loans. Refinancing your existing loans with a longer term can reduce your monthly payments. Alternatively, you may be able to lower your interest rate or shorten your term.

Before you apply for that refinancing plan, it’s a good idea to check your credit score, as it is an important factor that lenders consider. Many lenders require a score of 650 or higher. If yours falls below that, you may consider a cosigner on the loan.

Lenders typically offer fixed and variable interest rates, as well as a variety of repayment terms (which is often based on your credit score and many other personal financial factors). The loan you choose should ultimately help you save money over the life of the loan or make your monthly payments more manageable.

The Takeaway

If you only got grants, scholarships, or work-study funding through FAFSA, you don’t have to worry about paying FAFSA back, so to speak. But if you got federal student loans through filling out FAFSA, you will have to pay those loans back.

Luckily, you have a number of options to do so. If you have high-interest loans, consider looking into refinancing to see if you can reduce your monthly payments.

Whether you are looking to borrow for school or refinance your student loans, SoFi can help. See your interest rate in just a few minutes—with no pressure to sign up.


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SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF JANUARY 2022 DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
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Strategies to Pay Back Federal Student Loans

The prospect of paying back your student loans may seem daunting, but there are strategies you can take to pay off your federal student loan debt. This includes choosing from the number of repayment plan options available or opting to refinance your student loans. Of course, before you start making payments, you’ll want to know when you need to pay off your loans — and how — so you can determine an appropriate plan of action.

Read on for a full explanation of the strategies that could help you when it comes time to start paying back federal student loans.

When Do You Have To Pay Back Federal Student Loans?

Before you start worrying about how to pay off your federal student loans, you should know when you have to pay them back. If you just graduated or left school, you may have some time before you’re required to start paying back your student loans.

New grads generally have a grace period of six months before they are required to start throwing their hard-earned cash at their federal student loans. The exact length of the grace period depends on the type of loan and your specific circumstances.

Direct Subsidized Loans, Direct Unsubsidized Loans, Subsidized Federal Stafford Loans, and Unsubsidized Federal Stafford Loans all have a six-month grace period. This means that if you graduate in the spring, you may not need to make federal student loan payments until around October, depending on the date you graduate. If you’re a winter grad, you can expect to start repayment around June.

Unfortunately for graduate students, Direct PLUS Loans don’t have a grace period, which means that you’re on the hook for making payments 60 days after your final loan disbursement (though you may be able to get a six-month deferment). You may also lose your grace period if you consolidate your federal student loans with the government during your grace period. One caveat — if you’re a member of the armed forces on active duty, you may be eligible to extend your grace period during a deployment.

Private student loans are a different story, as these are loans from private lenders that set their own terms when it comes to loan grace periods. This means that private student loans may not offer a grace period at all, or that it may be shorter or longer than the federal student loan grace period.

How Do I Pay Back My Federal Student Loans?

Even though you may not be required to start paying off your student loans while they’re in a grace period, you might want to think about starting payments early.

Why start making payments before they’re due? During a grace period, some loans may still be accruing interest. That means that every month you wait to start making payments is another month that the total loan amount grows larger. Starting loan payback as soon as possible may help save on those capitalizing interest costs.

Figuring out how to pay federal student loans can be confusing. Paying back federal student loans starts with getting to know your loan servicer. There are several different loan servicers throughout the country who are responsible for managing federal student loans. Luckily, most loan servicers have robust websites where you can manage your student loan payments.

Your loan servicer’s website should allow you to view your loans, choose a payment plan, and set up automatic payments. Generally, you can make payments directly through the website, which means that you can avoid having to write out a check and worrying that it will get lost in the mail on the way to your loan service provider.

Choosing a Loan Repayment Plan

One integral loan repayment strategy is choosing a student loan repayment plan. If you are paying off federal loans, you may be able to choose between a few different repayment plans depending on which best fits your financial situation, such as:

The Standard Repayment plan: The Standard Repayment plan is the default loan repayment plan for federal student loans. Under the Standard plan, you pay a fixed amount every month for up to ten years in order to pay off the full balance of your loan.

The Extended Repayment plan: Extended Repayment plans work similarly to the Standard Repayment plan, but the term of the loan is longer. Extended Repayment plans generally have terms up to 25 years. The longer term allows for lower monthly payments, but you may end up paying more over the life of your loan thanks to additional interest charges.

For qualified applicants, there are also loan repayment options that are tied to the amount of your discretionary income. With income-driven repayment plans , the amount you owe on your student loans is tied to the amount of money you make. Income-based repayment plans are generally capped at 20 or 25 years, and any remaining balance on your loan may be forgiven after that term.

While you’ll automatically be put onto the Standard Repayment Plan if you do nothing else, you may want to consider choosing a different repayment plan depending on your financial situation. For example, if you’re itching to pay off your student loans as soon as possible, the Standard Repayment plan may work for you, but if you’re worried about affording loan payments, you may decide that you’re more comfortable with an income-driven repayment plan.

Refinancing Student Loans

Another strategy you may consider for paying back federal student loans is student loan refinancing. For some grads, loan refinancing may help save money over the term of your loan.

What are the benefits of refinancing with a private lender instead of just paying off the federal loans you currently owe? Student loan refinancing combines all of your current federal and private student loans into one new loan from a private lender, hopefully with better terms.

This means that you may be able to snag a lower monthly payment or even a shorter repayment term, both of which could save some serious cash over the life of your loan — depending on the term you choose, of course.

There are downsides to refinancing though. If you refinance your federal loans, they will no longer be eligible for any federal repayment assistance, like the Public Service Loan Forgiveness Program or any federal repayment plan. You also won’t be eligible anymore for federal repayment protections and will lose any remaining grace periods.

The Takeaway

As you can see, you have a number of options for paying back your federal student loans. You will want to consider your financial situation and which options you’re eligible for in order to choose the repayment plan that makes the most sense for you.

If loan repayment plans don’t seem like the right path for you, refinancing your student loans could be an option worth exploring.

Finding the right strategy to pay off your student loans can help you take control of your finances. See if refinancing with SoFi is right for you.


SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF JANUARY 2022 DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
SoFi Private Student Loans
Please borrow responsibly. SoFi Private Student Loans are not a substitute for federal loans, grants, and work-study programs. You should exhaust all your federal student aid options before you consider any private loans, including ours. Read our FAQs. SoFi Private Student Loans are subject to program terms and restrictions, and applicants must meet SoFi’s eligibility and underwriting requirements. See SoFi.com/eligibility for more information. To view payment examples, click here. SoFi reserves the right to modify eligibility criteria at any time. This information is subject to change.

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What is the Average Medical School Debt?

According to the Association of American Medical Colleges (AAMC), the average medical school debt for students who graduated in 2020 was $200,000. (Among the class of 2020, 27% graduated with no debt.)

While many med school students eventually may earn six figures or more, they also can expect to graduate with student debt that averages close to a quarter of a million dollars.

That’s just what these graduates owe for their medical school education. Researchers at EducationData.org found that 43% of indebted medical school graduates also have premedical education debt to deal with (for an average of $241,600 in total debt).

Which makes it crucial that aspiring and current medical school students, and graduates, understand their debt repayment options.

Medical School Debt Statistics

Here’s a snapshot of what the average med student debt can look like for graduates, based on a roundup of recent statistics:

•  Based on the most recent numbers from the National Center for Education Statistics , medical doctorate completers in the class of 2015-2016 had, on average, $246,000 in total education debt (premed and medical school). Compare that with the average for the class of 1999-2000: $124,700.

•  When the AAMC looked at members of the class of 2020 who took out educational loans, it found that:
5.4% borrowed $1 to $49,999 for premed studies and medical school
6.1% borrowed $50,000 to $99,999
8.2% borrowed $100,000 to $149,999
13.7% borrowed $150,000 to $199,999
25.1% borrowed $200,000 to $299,999
11.2% borrowed $300,000 to $399,999
2.9% borrowed $400,000 to $499,999

•  While the cost of medical school is rising by about 2.4% annually, the annual growth rate of medical school debt is 11%, as calculated by EducationData.

What Does This Mean for Borrowers?

It’s important to note that, when it comes to borrowing for medical school, loan interest rates offered by the federal government, along with the terms and conditions, might be different from borrowing as an undergrad.

Some med students may benefit from scholarships and loan forgiveness programs that could cut their costs substantially. But many will end up making loan payments for years—or even decades.

According to the number crunchers at EducationData, the average doctor will ultimately pay from $365,000 to $440,000 for his or her educational loans, with interest factored in.

Medical School Loan Options

Types of federal student loans available to medical students include Direct Unsubsidized Loans, with a limit of $20,500 each year.

Rates for this type of loan are currently lower than for the other type of federal student loan available to those going to medical school, Direct PLUS loans. The current rate for Direct Unsubsidized Loans is 5.28%, while Direct PLUS loans have an interest rate of 6.28% through July 1, 2022.

There isn’t a financial need requirement for either type of federal student loan, so many medical students qualify for both. With Direct Unsubsidized Loans, there is no credit check, but there is a credit check for PLUS loans.

Medical students also can apply for private student loans. Generally, borrowers need a solid credit history for private student loans, among other financial factors that will vary by lender. Private lenders offer different rates, terms, and overall loan programs.

Federal loans come with many student protections and benefits that private loans don’t, such as the Public Service Loan Forgiveness program and income-driven repayment.

Medical students also may choose to defer federal student loans during their residency, which isn’t typically an option with private student loans.

How to Deal With Debt

There are several strategies that medical school graduates with education bills to pay may consider.

Deferment

If you’ve ever borrowed money—for school or otherwise—you know that two critical factors can influence how much the loan will cost overall.

•  The interest rate you’re paying

•  How long you take to repay the loan or loans.

The repayment timeline is often extended when medical residents make partial monthly loan payments or no payments at all. Putting off payments may seem like a good idea during a stressful time, but delaying can be costly.

Most federal student loans, when deferred, continue to accrue interest. The problem those in medical fields can face, then, is debt accumulation during their residency, which can last anywhere from three to seven years.

Even while making a modest income—in 2021, the average resident earned $64,000, according to Medscape—the debt would grow considerably.

Part or all of your unpaid interest might be capitalized when you complete your residency. This means the accrued interest is added to the principal of the loan, and that new value is then used to calculate the amount of interest owed.

If you decide to put your loans in deferment or forbearance, making interest-only payments can reduce the amount of interest that could be added to the loan.

Recommended: Understanding Capitalized Interest on Student Loans

Income-Driven Repayment

An income-driven repayment plan is an option for medical residents who can’t afford full payments. The four plans limit payments to a percentage of borrowers’ income, extend the repayment period to 20 or 25 years, and promise forgiveness of any remaining balance.

In general, borrowers qualify for lower loan payments if their total student loan debt exceeds their annual income. Payments are based on discretionary income, family size, and state.

Refinancing Loans

Refinancing medical school loans is an option during residency, after residency, or both.

Refinancing with a private lender might help save you money if you can get a lower interest rate than the rates of your current student loans.

Refinancing means paying off one or more of your existing federal and private student loans with one new loan, which has one monthly payment.

If you refinance your student loans and get a better rate, you could choose a term that allows you to pay off the loan more quickly if you’re able to shoulder the payments, which should save you in interest.

Again, refinancing isn’t a good fit for those who wish to take advantage of federal programs.

Recommended: Student Loan Refinancing Calculator

Consolidating Loans

The federal government offers Direct Consolidation Loans, through which multiple eligible federal student loans are combined into one. The interest rate on the new loan is the average of the original loans’ interest rates, rounded up to the nearest one-eighth of a percentage point.

If your payment goes down, it’s likely because the term has been extended from the standard 10-year repayment to up to 30 years. Although you may pay less each month, you’ll also be paying more in interest over the life of your loan.

Schools With the Highest Student Debt

When it comes to student debt, all medical programs are not equal. According to U.S. News and World Report’s “Best Grad School” rankings, the range can be extensive. Out of 118 medical schools listed, the three that left grads with the most debt in 2020 were:

•  Midwestern University in Glendale, Arizona: $340,620

•  Midwestern University in Downers Grove, Illinois: $335,960

•  Nova Southeastern University Patel College of Osteopathic Medicine (Patel) in Fort Lauderdale, Florida: $308,321

On the other end of the spectrum, the schools that graduated students with the least amount of debt in 2020 were:

•  Stanford University in Stanford, California: $89,739

•  Columbia University in New York, New York: $97,891

•  University of North Texas Health Science Center in Fort Worth: $101,209

Public vs. Private Medical School

The cost of attending a private medical school is typically higher than a public school.

According to the AAMC, these were the median costs of tuition, fees, and health insurance for first-year medical students during the 2020-2021 school year.

•  Private school, in-state resident: $64,053

•  Private school, nonresident: $64,494

•  Public school, in-state resident: $39,150

•  Public school, nonresident: $63,546

According to EducationData, however, the average public medical school graduate leaves school owing a higher percentage of the cost of attendance (77.3%) than the average private school medical school graduate (65.3%).

The Takeaway

There’s no doubt that studying medicine can lead to a lucrative career, but the route can be daunting, in every way. When the average medical school debt tops $240,000, some aspiring and newly minted doctors look for a remedy, stat.

If you’re leaning toward refinancing, SoFi has a program specifically for medical residents. Potential borrowers might benefit from a low rate or low monthly payments during residency.

Check your rate in a few clicks.


SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF JANUARY 2022 DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Is There a Statute of Limitations on Debt?

Is There a Statute of Limitations on Debt?

This article is NOT LEGAL ADVICE. If you have a question about a specific situation, please consult with an attorney in your state.

A statute of limitations is a state law that limits the period during which one party, such as a creditor or debt collector, may bring an action in court to enforce a contract, such as a loan agreement or note. This means a creditor may not be allowed to sue a borrower in court to force them to pay a debt after the period has expired. The time limit (or clock) usually begins when the breach of contract (or default of loan) occurs. Most states have a specific statute of limitations for loans and debts.

The statute of limitations on debt varies by state and by debt type. State statutes of limitations typically apply to private student loans.

The statute of limitations on debt isn’t a wait-it-out solution that simply erases debt once it’s been owed for a few years. There may still be consequences to failing to pay back debts once the statute of limitations has expired. For example, creditors may be able to still report the debt to credit bureaus. And statutes of limitations may not apply to some debts, including federal student loans.

Here’s what you should know about statutes of limitations and debt.

What Is The Statute of Limitations on Debt?

Essentially, a statute of limitations on debt puts a time restriction on how long a creditor or debt collector is able to sue a borrower in state court to enforce the loan agreement and force them to repay the outstanding debts. In practice, this means that if a borrower chooses not to pay a debt, after the statute of limitation runs out, the creditor or debt collector doesn’t have a legal remedy to force them to pay.

To be clear, just because the statute of limitations has expired, it doesn’t mean that the borrower no longer owes the money, even though it does mean that the lender may not be able to take them to court for non-payment. The borrower will continue to owe the money borrowed, and their non-payment could be reported to the credit bureaus, which would then remain on the report for as long as allowed under the applicable credit reporting time limit .

Statutes of limitations don’t apply to all debts. They don’t, for example, apply to federal student loans. Federal student loans that are in default may be collected through wage or tax refund garnishment without a court order.

How Long Until a Debt Expires?

The length of the statute of limitations is determined by state law. State statutes of limitations on debt vary from three years to more than 10 years , depending on the type of debt.

Figuring out exactly which state’s laws your debt falls under isn’t always as simple as you might imagine. The applicable statute of limitations may be determined by the state you live in, the state you lived in when you first took on the debt, or even the state where the lender or debt collector is located. The lender may even have included a clause in the contract you signed mandating that the debt is governed by a specific state’s laws.

One commonality in every state’s statutes of limitations on debt is that the “clock” does not start ticking until the borrower’s last activity on the relevant account. Let’s say, for example, that you made a payment on a credit card two years ago and then entered into a payment plan with the debt collector last year but never made any subsequent payments. In that case, the statute of limitations clock would start on the date that you entered into the payment plan.

In this example, simply entering into a payment plan counts as “activity” on the account. This can make it confusing to determine if the statute of limitations has expired on your old debts, especially if you haven’t made a payment in a long time.

It may be possible to find out what the statute of limitations is by contacting the lender or debt collector and asking for verification of the debt. Remember that agreeing to make a payment, entering a payment plan, or otherwise taking any action on the account — including simply acknowledging the debt — may restart the statute of limitations.

After the statute of limitations on the debt has expired, the debt is considered time-barred.

Limitations on Debt Collection

Statutes of limitations on certain old debts may prevent creditors or debt collectors from suing you to recover what you owe. However, it’s important to realize that debt statutes of limitations don’t protect you from creditors or debt collectors continuing to attempt to collect payments on the time-barred debt. Remember, you still owe that money, whether or not the debt is time-barred. The statute of limitations merely prevents a lender or debt collector from pursuing legal action against you indefinitely.

Debt collectors may continue to contact you about your debt, but under the Fair Debt Collection
Practices Act
, debt collectors cannot sue or threaten to sue you for a time-barred debt. (Note that this act applies only to debt collectors and not to the original lenders.)

Some debt collectors, however, may still try to take you to court on a time-barred debt. If you receive notice of a lawsuit about a debt you believe is time-barred, you may wish to consult with an attorney about your legal rights and resolution strategies.

Disputing Time-Barred Debt With Debt Collectors

If a debt collector is contacting you to attempt to collect on a debt that you know is time-barred and you don’t intend to pay the debt, you can request that the debt collector stop contacting you.

One option is to write a letter stating that the debt is time-barred and you no longer wish to be contacted about the money owed. If you’re unsure, it may be possible to state that you would like to dispute the debt and want verification that the debt is not time-barred. If the debt is sold to another debt collector, it may be necessary to repeat this process with the new collection agency.

Remember, even though a collector can’t force you to pay the debt once the statute of limitations expires, there may still be consequences for non-payment.

For one, your original creditor may continue to contact you through the mail and by phone.

Additionally, most unpaid debts can be listed on your credit report for seven years, which may negatively affect your credit score. That means that failing to pay a debt may impact your ability to buy a car, rent a house, or take out new credit cards, even if that debt is time-barred.

Limitations on Student Loan Debt

Statutes of limitations don’t apply to federal student loan debt. If you default on your federal student loan, your wages or tax refunds may be garnished.

One option in managing your student loans is consolidating or refinancing them in order to decrease your loan term or secure a more competitive interest rate.

Borrowers who hold only federal student loans may be able to consolidate them with the federal government to simplify their payments.

Borrowers with a combination of both private and federal student loans might consider student loan refinancing as one option to get a new interest rate and/or a new term. Depending on an individual’s financial circumstances, refinancing can potentially result in a lower monthly payment (though it may also mean paying more in interest over the life of the loan).

All borrowers with federal loans should keep in mind that refinancing federal loans can mean relinquishing certain benefits, like forbearance and income-based repayment options.

The Takeaway

Statutes of limitations on debt create limits for how long debt collectors are able to sue borrowers in a court of law. These limits vary by state but are often between three to 10 or more years. Once the statute of limitations on a debt has expired, the debt is considered time-barred. However, any action the borrower takes on the account has the potential to restart the statute of limitations clock.

Statutes of limitations apply to private student loans. Statutes of limitations don’t apply to federal student loan debt, but if a federal student loan isn’t paid back, the borrower may have their wages garnished.

If you’re having trouble repaying your student loans, you may want to consider refinancing. Though, again, there are factors such as the loss of the federal student loan benefits to keep in mind when deciding whether it’s a good idea to refinance.

Learn more about how refinancing your student loans with SoFi could reduce your monthly loan payment or shorten your loan term.


SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF JANUARY 2022 DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.

External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
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Prepayment Penalties: Why They Exist and How to Avoid Them

A frequently offered nugget of financial wisdom is to use unexpected financial windfalls to pay down your debt. But what happens when paying down your loans comes with a prepayment penalty?

The best way to avoid prepayment fees, of course, is to choose a personal loan or mortgage without prepayment penalties. If you’re stuck with a prepayment penalty on your loan, however, all is not lost. There are ways to avoid paying loan prepayment penalties.

What is a Prepayment Penalty?

A prepayment penalty is when a lender charges you a fee for paying off your loan before the end of the loan term. It can be frustrating that a lender would charge you for paying off a loan too early because it’s natural to think a lender would appreciate being repaid as quickly as possible.

In theory, a lender would appreciate getting repaid quickly. But in reality, it’s not that simple. Lenders make most of their profit from interest, so if you pay off your loan early, the lender is possibly losing out on the interest payments that they were anticipating. Charging a prepayment penalty is one way a lender may recoup their financial loss if you pay off your loan early.

Lenders might calculate the prepayment fee based on the loan’s principal or how much interest remains when you pay off the loan. The penalty could also be a fixed amount as stated in the loan agreement.

Can You Pay off a Loan Early?

Say you took out a $5,000 personal loan three years ago. You’ve been paying it off for three years, and you have two more years before the loan term ends. Recently you received a financial windfall and you want to use that money to pay off your personal loan early.

Can you pay off a personal loan early without paying a prepayment penalty? It depends on your lender. Some lenders offer personal loans without prepayment penalties, but some don’t. A >mortgage prepayment penalty is more common than a personal loan prepayment penalty.

Differences in Prepayment Penalties

Because the terms of personal loans vary, the best way to figure out how much a prepayment penalty would be is to check a loan’s terms before you accept them. Lenders have to be upfront about how much the prepayment penalty will be, and they’re required by law to disclose that information before you take on the loan.

Personal Loan Prepayment Penalty

If you take out a $6,000 personal loan to turn your guest room into a pet portrait studio and agree to pay your lender back $125 per month for five years, the term of that loan is five years. Although your loan term says it can’t take you more than five years to pay it off, some lenders also require that you don’t pay it off in less than five years.

The lender makes money off the monthly interest you pay on your loan, and if you pay off your loan early, the lender doesn’t make as much money. Loan prepayment penalties allow the lender to recoup the money they lose when you pay your loan off early.

Mortgage Prepayment Penalty

When it comes to mortgages, things get a little trickier. For loans that originated after 2014, there are restrictions on when a lender can impose prepayment penalties. If you took out a mortgage before 2014, however, you may be subject to a mortgage prepayment penalty. If you’re not sure if your mortgage has a prepayment penalty, check your origination paperwork or call your lender.

Checking for a Prepayment Clause

Lenders disclose whether or not they charge a prepayment penalty in the loan documents. It might be in the fine print, but the prepayment clause is there, which is a good reason to read the fine print. If you’re considering paying off any type of loan early, check your loan’s terms and conditions to determine whether or not you’ll have to pay a prepayment penalty.

How are Prepayment Penalties Calculated?

The cost of a prepayment penalty can vary widely depending on the amount of the loan and how your lender calculates the penalty. Lenders have different ways to determine how much of a prepayment penalty to charge.

If your loan has a prepayment penalty, figuring out exactly what the fee will be can help you determine whether paying the penalty will outweigh the benefits of paying your loan off early. Here are three different ways the prepayment penalty fee might be calculated:

1. Interest costs. If your loan charges a prepayment penalty based on interest, the lender is basing the fee on the interest you would have paid over the full term of the loan. Using the previous example, if you have a $6,000 loan with a five-year term and want to pay the remaining balance of the loan after only four years, the lender may charge you 12 months’ worth of interest as a penalty.

2. Percentage of balance. Some lenders use a percentage of the amount left on the loan to determine the penalty fee. This is a common way to calculate a mortgage prepayment penalty fee. For example, if you bought a house for $500,000 and have already paid down half the mortgage, but want to pay off the remaining balance in a lump sum before the full term of your loan is up. In this case, your lender might require that you pay a percentage of the remaining $250,000 as a penalty.

3. Flat fee. Some lenders simply have a flat fee as a prepayment penalty. This means that no matter how early you pay your loan back, the amount you’ll have to pay will always be the prepayment penalty amount disclosed in the loan agreement.

Avoiding a Prepayment Penalty

Trying to avoid prepayment penalties can seem like an exercise in futility, but it is possible. The easiest way to avoid them is to take out a loan or mortgage without prepayment penalties. If that’s not possible, you may still have options.

If you already have a personal loan that has a prepayment penalty, and you want to pay your loan off early, talk to your lender. You may be offered an opportunity to pay off your loan closer to the final due date and sidestep the penalty. Or you might find that even if you pay off the loan early and incur a penalty, it might be less than the interest you would have paid over the remaining term of the loan.

You can also take a look at your loan origination paperwork to see if it allows for a partial payoff without penalty. If it does, you might be able to prepay a portion of your loan each year, which allows you to get out of debt sooner without requiring you to pay a penalty fee.

For example, some mortgages allow payments of up to 25% of the purchase price once a year, without charging a prepayment penalty. This means that while you might not be able to pay off your full mortgage, you could pay up to 25% of the purchase price each year without triggering a penalty.

Some lenders shift their prepayment penalty terms over the life of your loan. This means that as you get closer to the end of your original loan term, you might face lower prepayment penalty fees or no fees at all. If that’s the case, it might make sense to wait a year or two until the prepayment penalties are less or no longer apply.

When it comes to your money, you don’t want to make any assumptions. You still need to do your due diligence by asking potential lenders if they have a prepayment penalty. The Truth in Lending Act (TILA) requires lenders to provide documentation of any loan fees they charge, including a prepayment penalty. Also, under the TILA, consumers have the right to cancel a loan agreement within three days of closing on the loan without the lender taking any adverse action against them.

The Takeaway

When taking on debt, paying as little as possible on top of the principal amount borrowed is a good general rule of thumb. Consumers generally seek the lowest interest rates they can qualify for, a loan term that they feel comfortable with, and a loan that doesn’t add fees to their debt load. A prepayment penalty is one fee that can be avoided by asking questions of the lender and looking at the loan documents with a discerning eye.

SoFi Personal Loans are unsecured loans that charge neither prepayment penalties or any other fees. SoFi also offers other benefits to qualified borrowers. For example, SoFi offers an Unemployment Protection Program that works with eligible borrowers to pause their loan payments if they have an unexpected job loss through no fault of their own. The program also provides the borrower assistance finding a new job.

Check your rate on a SoFi Personal Loan.


SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp. or an affiliate (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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