Call it the Case of the Missing Paperwork.
No, that isn't a reference to an Encyclopedia Brown story — it's the reason why tens of thousands of private student loan borrowers could end up getting $5 billion of debt forgiven.
As reported by the New York Times, the controversy centers around loans owned by National Collegiate Student Loan Trusts, an umbrella name for 15 trusts that hold some 800,000 private student loans that total $12 billion. The organization is known for aggressively pursuing borrowers who've fallen behind on their payments, often filing lawsuits against them.
The problem? In many cases, the trusts are unable to provide documentation that it actually owns the student loans in question, which means judges end up dismissing the cases against the borrowers — and thus wiping out the debt altogether.
How Did This Happen?
When you take out a private student loan, you kick off a complex process among many banks, investors and institutions. In this case, the loans in question were originated by banks, who then bundled the loans and sold them off as investments, where they eventually landed with National Collegiate. But National Collegiate isn't the one who actually collects on the loans — that job goes to the loan servicer and ultimately to the debt collection company, if the loans are in danger of going into default.
So as the loans got passed through all these channels, paperwork documenting their ownership got lost — thereby weakening the chances that National Collegiate could collect on those loans. In fact, a separate audit found that among nearly 400 National Collegiate loans, not one had the necessary paperwork to document the chain of ownership.
Who Qualifies to Have Their Loans Cleared?
The private loans being pursued (accounting for $5 billion in debt) were made to students more than a decade ago by dozens of banks across the country, which means many borrowers may not have even realized their loans were sold to National Collegiate until getting slapped with a lawsuit. (The company has brought tens of thousands of lawsuits within the past five years — and more than 800 so far this year.) And according to the New York Times, National Collegiate would sometimes win a suit automatically because borrowers never showed up to court.
The takeaway? Don't back down if you're being pursued by creditors because you assume they are in the right. To date, hundreds of National Collegiate cases have been dismissed simply because borrowers challenged them and then the trusts couldn't produce the needed paper trail to prove their case. In some instances, borrowers were being sued for loans they didn't even remember taking out.
The whole situation is also a much-needed reminder for why it's important to keep all your lending paperwork in order, including your original promissory note, statements that show how much you actually owe, and any company communications — or lack thereof — on whether your debt has actually changed hands.