Missing Paperwork Might Erase Billions in Student Loan Debt

Bryan Michalek | July 19, 2017
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Every year, millions of people apply for admission to colleges and universities in hopes of earning a degree. Many take out student loans to help pay for their education with a plan to pay off their debts once they get the job. But for tens of thousands of people, those debts might be wiped due to missing paperwork. 

According to the New York Times, an estimated $5 billion in loans are being disputed in court because creditors had faulty paperwork and can't prove who owns the loans. As it turns out, some judges have already dismissed dozens of cases, which relieved many people from having to pay their debts. In a court record review done by the New York Times, the dismissals are due to flawed collection cases with incomplete ownership records and mass-produced documentation.

The main piece of this puzzle is the National Collegiate Student Loan Trusts, which can't prove in court that it has the necessary documentation to show ownership over the contested loans. In a recent legal filing, the New York Times uncovered that the National Collegiate's lawyers are concerned that the likelihood of defaults will become commonplace now that news is spreading about the faulty paperwork. 

The National Collegiate is a collection of 15 trusts are responsible for holding 800,000 private student loans, amounting to $12 billion (but technically $7 billion when you account for the $5 billion that is in default).

The news of the faulty loans came out when the National Collegiate sued Samantha Watson, 33, over failure to keep up with her loan bills. Her lawyer, Kevin Thomas of the New York Legal Assistance Group, said the paperwork that was submitted by the National Collegiate's was faulty, with some saying Watson was enrolled in a school she never attended. 

The judge ruled in favor of Watson because the trust "failed to establish the chain of title" on the loans. Since then, cases in New Hampshire, Ohio, and Texas have been thrown out. Typically, these cases go in favor of the trusts, but that is because the borrowers don't show up to court. Now, because of the fuzzy chain in which these loans are bought and passed along from banks to finance companies to trusts, a loophole is surfacing that is proving to be devastating for these institutions.

A lawyer with the National Consumer Law Center, Robyn Smith, came out with a detailed report in 2014 that outlined dozens of cases of inaccurate paperwork in cases over private student loans. Smith also found that in many of the cases where the borrower planned to fight back the company's drop the lawsuits begging the question of whether they even possess the documents necessary to show that they own loans. 

Nancy Thompson, a lawyer in Des Moines, had 27 cases dismissed before trial brought forth by the National Collegiate and the ones that did illustrate paperwork that had critical flaws according to the New York Times. Even more shocking was a report that had found in a random sample of 400 National Collegiate loans, there were none that had paperwork to prove the chain of ownership. 

(Cover photo: Stubblepatrol.com)

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