The New York Times created a considerable stir in July 2017 by detailing a widespread student loan repayment crisis. According to the paper, one of the largest holders of private loans, National Collegiate Student Loan Trusts, had been struggling to provide documentation that proves it owns the $5 billion in delinquent accounts that it was attempting to collect. Without that paperwork, dozens of lawsuits brought against defaulting borrowers were being dismissed.
In September 2017, the Consumer Financial Protection Bureau settled with National Collegiate and ordered them to refund payments and penalties made by borrowers whose debts National Collegiate couldn't prove were owed. An auditor was then hired to evaluate the Trust's outstanding loans to see if they were collectable.
A lack of a paper trail is never a good thing for the plaintiff in attempting to collect a debt, and some student loans may wind up being fully "forgiven" as the audit continues. But these types of headlines shouldn't give you high hopes that your outstanding loan will be erased. Here’s why.
First, it’s helpful to understand how a typical chain of custody works for private student loans. (Federal loans, which typically have more forgiving terms, are a separate issue entirely.) Banks and other lenders offer loans to applicants, then turn around and sell bundles of those loans to a depositor. That depositor will offer the loans to an umbrella organization like National Collegiate, which is comprised of 15 private trusts holding the paper on more than 800,000 loans.
This lengthy chain of custody is where the problems begin. Because loans pass through several hands, it’s not always clear who has retained the documentation needed by courts to prove that National Collegiate is the owner of the debt they’re attempting to collect from a borrower in default. As a result, judges tasked with these cases often have no choice but to dismiss them.
That led to a series of headlines about $5 billion in “forgiven” debt, which may sound comforting to someone burdened with a towering student loan at exorbitant interest rates. However, as several attorneys speaking to the media have pointed out, it’s not that simple. The cases that have been dismissed were in court because the borrower was already in default. In situations where National Collegiate can prove ownership of the debt, those debtors are facing wage garnishment and a negative impact on their credit score. Simply defaulting on a loan and hoping you happen to be one of the people whose paperwork is incomplete is a dangerous form of wishful thinking.
In the event you had no choice but to default and might benefit from National Collegiate's poor record-keeping, you may not walk away unscathed. According to debt relief attorney Daniel Gamez, a student borrower who sees his or her case dismissed is not facing a clean slate. National Collegiate is fighting so many defaulted loans that they may choose to drop cases based on logistical issues like witness scheduling. Still, even if the lawsuit is dropped, National Collegiate may have the option to refile it at a later date—this time armed with the documentation and resources they need. And any debt, even if it’s been declared unenforceable, may still affect your credit score.
Ultimately, whether or not National Collegiate can produce paperwork doesn’t change the fact that a borrower has a student loan that they’ve agreed to repay. As a creditor, National Collegiate is likely to take every legal measure available in order to collect on that debt. While those amounts may be “forgiven” in court, they’re not likely to be forgotten.
If you happen to be struggling with private loan repayments, it's not a good idea to hope some misplaced documents might spare you financially. Instead, try to be proactive. A growing number of student debt clinics are popping up across the country to advise those who are burdened by outstanding balances. Organized by the American Federation of Teachers, these classes simplify the complexities involved in loan forgiveness options and can help you plan a course of action. And while federal loans typically have the most flexible methods of lowering balances, you can still cope with private loans via refinancing that can lower interest rates, monthly payments, or both.