News that billions of dollars in overdue private student loan debt could be wiped away due to shoddy paperwork prompted a flurry of interest among borrowers Tuesday, with many of them asking one key question: Are my loans affected?
The short answer: Probably not.
The New York Times reported Monday that judges around the country have dismissed dozens of lawsuits against delinquent borrowers because the entity bringing the suits—which purchased loans from other originating lenders—can't produce paperwork to prove it owns the debt. Sometimes, explains student loan expert Mark Kantrowitz, such issues have arisen because documents have gone missing, particularly for older loans where actual hard copies were transferred. In other cases, he says, there are basic misinformation or data input mistakes—such as mixing up borrowers' names or Social Security numbers.
At the center of all of the cases cited by the Times is an entity known as National Collegiate Student Loan Trusts, which holds roughly 800,000 private loans.
That's a big number, but it accounts for a relatively small fraction of overall U.S. student debt. While a large share of Americans have student loans, most of the $1.3 trillion in outstanding student debt are federal student loans. That leaves roughly $108 billion in private student loans, of which National Collegiate holds $12 billion, or 11%.
Ask yourself these questions to determine whether your loans will be affected.
Are my loans owned by National Collegiate?
National Collegiate isn't a lender, guarantor, or loan servicer. It is a group of trusts that was set up by a company called First Marblehead Corporation to buy loans as investments. So even if it owns your loan, you probably haven't heard its name before.
The loans in question here were taken out before 2007, and some other institution would have actually originated the loan. Documents filed with the SEC, for instance, show that the majority—but not all—of the loans owned by National Collegiate were originated by Bank One, Charter One Bank, Bank of America, JPMorgan Chase, GMAC Bank, RBS Citizens Bank, and Union Federal Savings Bank. But National Collegiate trusts don't own all of the loans by made by these lenders, and these aren't the only lenders that sold loans to National Collegiate.
You can ask your loan servicer to show you a promissory note proving who owns the loans, but the servicer isn't legally required to turn that over, says Robyn Smith, an attorney with the National Consumer Law Center.
Richard Gaudreau, a New Hampshire-based bankruptcy attorney who has represented borrowers being sued by National Collegiate, says another clue could be Transworld Systems, the debt collector that's generally involved in these cases, or American Education Services (AES), the loan servicer that manages National Collegiate's debts. If you've gotten collections notices from Transworld or bills from AES, there's a chance National Collegiate holds your student loan.
Even if National Collegiate owns your loan, however, that doesn't mean you're off the hook. There are additional considerations.
Am I paying my loans on time?
If you're currently in good standing on your loans, your debt won't be magically erased. Judges have only dismissed cases in which National Collegiate sues borrowers who aren't paying their debts. (The Times reported that $5 billion of National Collegiate's student loans were in default.)
Has National Collegiate sued me for nonpayment?
While experts say National Collegiate is one of the most aggressive private loan holders, it still doesn't usually bring a lawsuit until borrowers are at least several months overdue on their payments, Gaudreau says.
Even if you are brought to court, there's no guarantee National Collegiate won't be able to drum up the documents to prove it owns the loans. "It's not like they're rolling over on these cases," Gaudreau says. "It's a case-by-case battle. Don't just think if have an NCT loan, it's gone."
What to Do If You Are Affected
If you've been served with a lawsuit, get an attorney. Smith, of the National Consumer Law Center, recommends finding a lawyer who specializes in debt collection and credit reporting issues through the National Association of Consumer Advocates' search tool.
Borrowers who can't afford an attorney can contact their local Legal Services office, Smith says.
Do not ignore the notice. If you don't show up in court, National Collegiate (or any other private loan company) will win a default judgment—giving it a court order to collect your debt.
Smith also encourages borrowers to file complaints with their state attorney general and the Consumer Financial Protection Bureau, and to push state legislators to prohibit private student loan holders from obtaining judgments when they lack proof that they own the loans that are the subject of the lawsuit.