How Billions in Student Loan Debt May Soon Disappear

Pencil erasing the phrase student loansYou’d be hard-pressed to scroll through any major news outlet without seeing a story about the growing student loan debt crisis, and for a good reason. Over the last five years, the average student loan debt owed by graduating college students has risen 15%, resting, for now, at a little more than $32,000 per borrower. For a sizeable portion of the 43 million borrowers paying back student debt, their total balance due reaches a staggering six figures – a financial pill that can be difficult to swallow each month. While there are several methods to reduce student debt payments in an effort to lessen the blow to cash flow month to month, the burden of student loans is a long-term plight for many.

However, recent news points to relief for thousands of student loan borrowers, thanks to a paperwork fiasco at a large private student loan servicer. National Collegiate Student Loan Trusts – a large company that, through multiple avenues, owns just north of 800,000 private student loans totaling more than $12 billion – services several loans that are in default. Once a student loan remains unpaid for an extended period, and the collector has not had success in coming to a repayment agreement with the borrower, the typical next step is to file a lawsuit to recover losses. But the New York Times reported that a handful of recent lawsuits have been dismissed by the court due to insufficient evidence of ownership.

Failing to Prove Chain of Title

Although it is common practice for student loan debt to make its way to the hands of a debt collector, the original servicer has a responsibility to maintain records that clearly show the chain of title, also known as ownership. A company, whether a third-party collection agency or a student loan servicer, cannot effectively collect on a debt that does not include information about which organization actually owns the debt and how much the borrower actually owes. This stipulation is a powerful legal protection meant to safeguard borrowers from unfair debt collection practices, whether the debt is in default or not.

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When student loan debt is bought and sold by investors, referred to as the securitization process, documentation that shows who is owed the money, a history of payments received, and an accurate outstanding balance is often lost or unclear. In the case of National Collegiate, the handful of lawsuits filed against borrowers in default have failed to include the appropriate chain of title paperwork showcasing these ever-important details. Without proof, some lawsuits have been dismissed, and the borrowers are essentially off the hook for whatever amount the collector claimed was due to them. It is estimated that thousands more borrowers may face the same student loan debt lottery as more poorly documented loans are reviewed by the courts in the upcoming months.

Impact on Borrowers

So far, only a portion of student loans in default owned by National Collegiate or one of its affiliates are affected by the documentation snafu. The borrowers who have the potential to have their student loan debts wiped away may not be aware of the beneficial mishap until a lawsuit is brought against them and then subsequently dismissed. However, if an outstanding student loan debt is cleared, it has the potential to have a positive impact on the borrower’s overall credit score by reducing total credit utilization. The default will still be viewable on a credit report, though.

Other student loan borrowers in default or struggling to repay their private student loan debt should reach out to their servicer to discuss potential relief, either through a temporary forbearance or a settlement that reduces the total amount that must be repaid over time. While not every servicer offers such a reprieve, getting in touch before the debt is purchased by a debt collection agency may stave off a costly lawsuit in the future. For borrowers with federal student loans, consolidation through the Department of Education may be an option, as well as similar requests for forbearance due to financial hardship. Refinancing through a private student loan lender may also be an option for those seeking a lower interest rate or a more manageable repayment plan. Student loan servicers are more apt to work with a borrower to create a payment plan that fits within the borrower’s budget, but only when borrowers are proactive in the process.

Having student loan debt disappear from an individual’s balance sheet may feel like a dream come true for the borrowers affected by the National Collegiate debacle, but only time will tell how many borrowers are positively affected by the company’s documentation failure. For now, student loan borrowers can do themselves a favor by paying on time each month and working directly with their servicer to come up with a realistic solution when repayment is not an option.

Posted on August 7, 2017 by in Personal Loans, Student Loans

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