Billions In Student Loan Debt May Be About To Disappear For Tens Of Thousands Of Americans

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There’s no financial issue more pressing than student loans. There’s $1.3 trillion in student loan debt out there, and it’s only heading upward. But a new legal case might make $12 billion of loans, and potentially even more, legally vanish for good, with the students in question off the financial hook.

It sounds too good to be true, but it’s actually a real legal problem. One of the most aggressive student loan companies, a network of 15 trusts called the National Collegiate Student Loan Trusts, has, according to The New York Times, had real trouble proving in court that it actually owns the loans it’s suing people over:

Robyn Smith, a lawyer with the National Consumer Law Center, a nonprofit advocacy group, has seen shoddy and inaccurate paperwork in dozens of cases involving private student loans from a variety of lenders and debt buyers, which she detailed in a 2014 report. But National Collegiate’s problems are especially acute, she said. Over and over, she said, the company drops lawsuits — often on the eve of a trial or deposition — when borrowers contest them. “I question whether they actually possess the documents necessary to show that they own loans,” Ms. Smith said.

The Times relates cases where borrowers pointed out the trusts had paperwork claiming they went to schools they never enrolled in, owed debts at amounts they’d never borrowed, and featured other glaring inaccuracies about the paperwork filed. That’s thanks to how the trusts work: They buy up private student loan debt, slice it up, and repackage it to sell to investors. Sound familiar? It should: That’s what caused the subprime mortgage crisis and the Great Recession.

For the trusts, it means every last penny of their $12 billion in debt might come under legal scrutiny. If they can’t prove in court the person on the documents took out the loans, they can’t make that person pay up. Worse, the judgements they’ve already gotten may come under review, meaning that, potentially, years of wage garnishments and other financial penalties inflicted by the courts may be reversed, and the trusts will not only be on the hook to return that money, they’ll also be in trouble with the governments who collected that money.

And for the larger industry, it might portend even bigger problems. While the trusts here have an especially severe problems with paperwork, they are far from the only ones. Even the government’s student loan services are facing accusations of incompetence, and 20% of students take out private debt. In other words, far more than just this $12 billion may ultimately be at stake.