Economy

The Big Mistake That Could Wipe Away Your Student Loans

July 18th 2017

By:
Danielle DeCourcey

At least $5 billion worth of loans held by tens of thousands of people could be dismissed because of missing paperwork. 

"I think it's definitely of an indication of the incompetence that happens at all levels of the student loan industry," Cody Hounanian, program director at Student Debt Crisis, told ATTN:. 

A review of court documents by New York Times reporters Stacy Cowley and Jessica Silver-Greenberg found that the debt of borrowers in dozens of lawsuits with creditors has already been dismissed. 

The National Collegiate Student Loan Trusts, one of the largest private student loan owners in the U.S., has potentially incomplete or misplaced paperwork for thousands of loans, many of which that were originally made by banks and then sold to companies as investments.

saving-money

Hounanian told ATTN: that borrowers are being held to a higher standard than the companies who make money off them. Indeed, companies are taking borrowers to court to demand payment in cases where they don't even have the legally required paperwork for the loans. 

"This shows a level of abuse and neglect, and meanwhile they're profiting from the loans," he said. "They're dragging people to court and those people's lives are being shook along the way, and they don't know what's going to happen. Thankfully there's been a resolution for some of the borrowers."

The Times investigation compared the private student loan problems to the 2007 subprime mortgage crisis that helped lead to the Great Recession

"Some of the problems playing out now in the $108 billion private student loan market are reminiscent of those that arose from the subprime mortgage crisis a decade ago, when billions of dollars in subprime mortgage loans were ruled uncollectible by courts because of missing or fake documentation," the Times reported. "And like those troubled mortgages, private student loans—which come with higher interest rates and fewer consumer protections than federal loans—are often targeted at the most vulnerable borrowers, like those attending for-profit schools."

Why would private student loan companies target students who may not be able to pay them? 

Lawsuits filed by President Barack Obama's administration and the states of Washington and Illinois allege that student loan giant Navient issued private student loans—that it expected to fail—in order to build relationships with schools so that they could be the servicers for federal student loans. The alleged plan was, basically, to lose some money in order to make a lot more. The students who didn't default are making huge monthly payments, however, sometimes amounting to more than their rent

"Unfortunately, the private student loan situation hasn't been addressed with the kind of fervor we'd like," Hounanian said. "Regulating some of the industry would help. There are for-profit colleges that are shoveling risky loans onto low-income students, and to veterans, and giving them nothing in return. Too often students are getting degrees that are worthless." 

Private student loans have less protections than federal student loans. 

Even for students who receive a good degree and find a stable job, the amount of private student loans can balloon over time because they do not have the same protections as ones from the federal government. Students who are struggling to pay their federal student loans can apply for income-base repayment plans, and can apply for deferment or forbearance.

Private student loan companies do not have to offer any of these options. However, unlike with federal student loans, it is possible for a court to reduce the amount a private student loan borrower owes, or wipe out the debt altogether through a settlement. Hounanian said borrowers should pay attention to the paperwork private loan companies are required to have, especially if they're in litigation with a private student loan company. 

"Some of the personal testimonials we've heard are of people who were facing litigation and did hire an attorney as the last option they had," he said. "And because of improper paperwork and improper procedures some or all of their debt was reduced. Those who are facing the most financial difficulties and who are already facing litigation may want to look into their paperwork."

RELATED: Who Is Profiting Off Of Your Student Loans?