NEW YORK–Tens of thousands of people who took out private loans to finance college but who are delinquent on payments could have their debts eliminated because critical paperwork is missing.
According to The New York Times, the troubled loans, which total at least $5 billion, are part of a protracted legal dispute between the students who are in debt and a group of creditors who have been aggressively pursuing them in court after they fell behind on payments.
The Times reported that judges have already dismissed dozens of lawsuits against former students, essentially doing away with their debt, due to missing documents that prove who owns the loans. The Times said its review shows that many other collection cases are “deeply flawed, with incomplete ownership records and mass-produced documentation.”
The Times’ report said the student loan situation is similar to what took place as part of the subprime mortgage crisis when many loans were ruled uncollectable due to missing or fake documents.
At the heart of the current mess over private student loans is National Collegiate Student Loan Trusts, which has been struggling to prove in court that it has the legal paperwork showing ownership of its loans, which were originally made by banks and then sold to investors. The New York Times reported that National Collegiate’s lawyers warned in a recent legal filing, “As news of the servicing issues and the trusts’ inability to produce the documents needed to foreclose on loans spreads, the likelihood of more defaults rises.”
National Collegiate is an umbrella name for 15 trusts that hold 800,000 private student loans, totaling $12 billion, according to the Times. More than $5 billion of that debt is in default, court filings show. The trusts have been aggressively pursuing borrowers who become delinquent, and across the U.S. National Collegiate has brought at least four new collection cases each day, on average — more than 800 so far this year — and tens of thousands of lawsuits in the past five years, the Times said.
The Times said that judges in New Hampshire, New York, Ohio and Texas have all tossed out lawsuits by National Collegiate, ruling the company could not prove it owned the debt on which it was trying to collect. The loans that National Collegiate holds were made to college students more than a decade ago by dozens of different banks, then bundled together by a financing company and sold as securities, the Times added.