Wiping away private student loans is a difficult, almost impossible task, for borrowers. But some debtors are finding their tabs zeroed out as the result of a long-running legal battle between former students and a group of student loan creditors attempting to collect on defaulted loans. In the end, the courts could forgive up to $5 billion in private education loans if the creditor continues to fail in providing critical paperwork. 

The New York Times reports that tens of thousands of students who took out private education loans to attend college stand to have their debts forgiven as judges have already begun to dismiss lawsuits amid missing documents.

The crux of the issue lies in the National Collegiate Student Loan Trusts and its inability to prove the company owns the overdue student loans.

The Times looked at a handful of lawsuits, both ongoing and those that have been dismissed, in which National Collegiate has gone after students in court after they failed to make payments on their student debts.

 

The Times’ piece offers a wealth of information in a look behind the private student loan collection curtain; we suggest you read the entire article. Here are five things we learned about the billion-dollar loan forgiveness saga.

1. A Private Student Loan Behemoth

The National Collegiate Student Loan Trusts is a company made of 15 different trusts that issue and collect private student loans.

In all, National Collegiate holds more than 800,000 student loans worth about $12 billion, the Times reports, with about $5 billion of those loans potentially earmarked for forgiveness depending on court rulings.

Those court rulings will involve thousands of student loans issued more than a decade ago that have since entered default as a result of borrowers’ inability to pay.

Borrowers who take out private student loans have few options when it comes to repaying their overdue debts. Private loans come with fewer protections than federal student loans, which offer borrowers the ability to enter into repayment plans and often come with lower interest rates.

Because of these higher interest rates and steep fees and penalties, private loan debts can increase significantly over just a few years, leaving borrowers with debts they’ll never be able to repay. In the end, many will default on their loans, often creating a one-way ticket to court.

So far, the Times reports that the Trust has brought more than 800 collection cases against borrowers so far this year, with an average of four cases being introduced each day.

2. Why Court Cases?

When a student loan borrower takes out a loan, the loan originator will bundle multiple loans together and sell them to a depositor, like National Collegiate Funding. These depositors then sell the debts to a trust, like National Collegiate Student Loan Trust.

While National Collegiate then owns the loans, it contracts a student loan servicer to collect payments and send them to the Trust. If a borrower fails to pay on these debts, the servicer turns to its bank, which then contracts work to a debt collector. If the borrower still can’t pay the collector initiates a lawsuit against the borrower.

However, because the loan is owned by National Collegiate Trust, it becomes that company’s burden to prove the loan is legitimate, belongs to the borrowers, and is owned by the company.

In National Collegiate’s case, the company aggressively attempts to collect these debts. In many cases, this involves going to court seeking an order allowing the company to garnish wages, Social Security, or other means of collecting payments.

The Trust wins many of these court cases automatically though default judgments, which occur when a defendant — in this instance the borrower — fails to show up to make their case.

But when a borrower does show up, it’s proven to be a tougher battle for the National Collegiate.

3. Following The Paper Trail

The Times reports that dozens of National Collegiate’s lawsuits against borrowers have been dismissed in recent years after the company failed to properly show that borrowers actually owed the debt.

This is because of student loan’s path after it is first issued. Like many other loans, one company will issue an education loan that is then sold to others.

In National Collegiate’s case, the Times reports that the company holds loans that were made years ago by a plethora of banks, then bundled together and sold to investors.

Over time, records on these loans can disappear. Which appears to be the case in the lawsuits being dismissed.

In many instances, the Times reports, judges have ruled in the borrower’s favor, wiping away their debt, because National Collegiate couldn’t prove it owns the student loans.

But not all of the cases are being dismissed by the courts. The Times reports that National Collegiate will often drop a case at the last minute when borrowers contest the suits.

4. Wiping Away Debt

Consumer advocates and lawyers representing students sued by National Collegiate question the company’s ability to prove that debts are actually or owned by the Trust.

In a recent case involving a Bronx woman, a judge dismissed the suit, ruling [PDF] that National Collegiate “failed to establish a chain of title” or ownership for the woman’s debts.

That case, the Times reports, began last year when National Collegiate sued the 33-year-old woman who had taken out private student loans to attend Lehman College.

After graduation, the woman says she fell on hard times; her daughter became ill and she was forced to quit her job for a more flexible gig as a nurse’s aide.

When National Collegiate filed several lawsuits against the woman, her lawyer tells the Times the paperwork was a mess. In fact, in one document, the Trust claimed the woman took out loans for a school she never even attended.

While the woman admits that some of the loans listed in the case were hers, the others certainly weren’t.

In the end, the judge dismissed the four lawsuits, forgiving nearly $31,000 in student loans.

5. Looking For Answers

National Collegiate’s shoddy paperwork issues aren’t sitting well with members of the Trust, the Times reports, noting that at least one financier behind the trust has criticized the company.

Donald Uderitz, the founder of Vantage Capital Group — a beneficial owner of National Collegiate’s trusts — has raised concerns about National Collegiate’s use of lawsuits against defaulted borrowers.

“We don’t want National Collegiate to be the poster boy of bad practices in student loan collections,” the told the Times.

Uderitz has even hired a contractor to audit the company serving National Collegiate’s borrowers. The Times reports that a random sample of 400 National Collegiate loans found none included proper paperwork establishing ownership.

That’s troubling both for Uderitz and consumer advocates.

“It’s fraud to try to collect on loans that you don’t own,” Urderitz tells the Times. “We want no part of that. If it’s a loan we’re owed fairly, we want to collect. We need answers on this.”

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