The Famous $5 Billion in Private Student Loans
You may have seen the headlines in the news lately about $5 billion in private student loans being wiped away. While that would be a magical day, I’m sorry to say that you shouldn’t get your hopes up. The situation is much more complicated than those headlines suggest.
Here’s how private loans work, in a nutshell:
- Private lender originates the loan.
- Private lender sells the loan to a depositor.
- Depositor sells the loan to a trust.
- Trust employs a student loan servicer.
- Borrower makes payments to their loan’s servicer.
- Servicer sends payments back to the trust.
If you’re having a hard time following that, you’re not alone. That becomes important later.
When you default on your private student loans, the trust can sue you to collect your debt. Most of the time, the trust wins the lawsuit because the borrower doesn’t show up to court. In those cases, the court allows the trust to start garnishing wages to get the money they are owed.
The Chain of Title
National Collegiate Funding, LLC, is made up of 15 trusts that buy private student loans and aggressively go after the borrowers to collect the debt. They play a number game, suing hundreds of defaulted borrowers and hoping they don’t show up in court.
Recently, a borrower got sued by National Collegiate and decided to fight. She hired a lawyer and they discovered that the paperwork was a mess. In addition to listing the wrong college on some of the paperwork, the trust could not provide proof that they owned the loans.
The judge dismissed the lawsuits because the trust “failed to establish the chain of title” on the loans. That means that they couldn’t track the loans in the process outlined above. There wasn’t clear evidence that they owned those specific loans.
Without the judge’s go-ahead, the trust did not have the authority to collect the student loans through garnishing wages.
But that doesn’t mean the loans were dismissed.
The Danger of Misunderstanding
The stories you’ve been seeing suggest that the loan balances are being dismissed with the lawsuits. That’s dangerous because the debt isn’t going anywhere. In fact, the borrowers who win these lawsuits are still responsible for their balance (in rare cases the debt can be dismissed too, but that doesn’t appear to be true now). They just can’t be touched by collectors.
Why does this matter? If those debts can’t be collected, what’s the point of paying them? And if you are free to not pay them, they’re as good as forgiven, right?
Well, even if you don’t feel you have to pay them, you still have a dark mark on your credit report from the default. That may haunt you for seven years until it disappears from your credit report. That’s a long time for creditors to make decisions based on such a negative report.
For those who have had court cases dismissed and choose to continue ignoring their loans, they have an option for dealing with the bad credit. They could bring their court results to the major credit bureaus and prove that the debt should be removed based on the court decision. According to Adam Minsky, a lawyer specializing in student loans, that’s a long shot.
Even if you feel invincible when it comes to your student loans, that default can prevent you from your future financial goals. You could be turned down for a home loan, car loan or other credit.
What you should take away from those stories is that if you already defaulted on your private student loans and the trust is suing you, by all means, fight it. Show up to the court and make them prove they have the right to collect. Exhaust your options. But realize that winning might not make your loans disappear.
If you have not defaulted, do not take these stories as advice to do so. Get back on track, or stay on track, with your payments. You’ll eventually pay off your debt and your credit will thank you.
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