Why $5 billion in private student loan debt may be wiped away

The devil's in the details.

University Students Celebrate Their Graduation
Getty Images | Andreas Rentz

The devil’s in the details.

Thousands of people might have their student loan debt may be wiped away forever—all because of missing or incorrect paperwork.

The New York Times reported this week on a complicated legal battle between students and creditors. The students, who collectively took out at least $5 billion in private loans for college, may not have to repay their debts because the organization that controls the loans didn’t keep good records.

Here’s how this all came to light: When the student borrowers stopped making payments or fell behind, the National Collegiate Student Loan Trusts began aggressively pursuing them in court, filing lawsuits against the former students to make them pay.

As it turns out, however, judges are dismissing the suits because the documents that prove who owns the loans are missing. When a suit gets thrown own, the student’s debt is essentially wiped away.

A lawyer who represents the trusts declined to comment for the New York Times story, but one of the financiers behind the trusts says he wants to get to the bottom of the problem and make sure the trusts are only collecting on loans they own.

The loans were originally made by banks, then sold to investors. Those investors are represented by the National Collegiate Student Loan Trusts, a collection of 15 trusts that hold $12 billion in student loans. The trusts have filed more than 800 lawsuits against student loan borrowers who are behind on payments so far this year—on average, they file four new cases a day.

One of those lawsuits was filed against a woman named Samantha Watson, who graduated from Lehman College in the Bronx with a degree in psychology. She’s a 33-year-old mother of three and the first person in her family to go to college. She fell behind on her loan payments after her daughter got sick, so National Collegiate sued her.

She found a lawyer with the New York Legal Assistance Group, and when her lawyer began studying some of the documents National Collegiate filled, he realized they were filled with errors—they said she had enrolled at a school she never attended.

A judge dismissed four lawsuits against Watson, which wiped out $31,000 in debt, because the trusts “failed to establish the chain of title,” he wrote.

The lawsuits center on private loans, which are less flexible than federal student loans, carry high interest rates and don’t have many of the same protections as federal loans. Many of the students who take out private loans attend for-profit colleges, which close because of fraud allegations. Though they aren’t able to finish their degree, they still have to make payments on their loans.

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