Like magic, US students owing $5 billion of debt might suddenly owe nothing

All is forgiven—or sometimes forgotten.
All is forgiven—or sometimes forgotten.
Image: AP Photo/Seth Wenig
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Some lucky Americans are finding that their huge piles of student debt may not actually exist. All thanks to a fluke in paperwork, rather than politics or beneficence.

The National Collegiate Student Loan Trusts are a collection of trusts that together comprise one of the US’s biggest owners of private student loans, possessing around 800,000 different loans totaling $12 billion. They aggressively hound student borrowers who fall behind on their bills and have brought tens of thousands of lawsuits against defaulters in the past five years.

But according to a New York Times report this week (paywall), the trusts have been failing in court to produce the legal paperwork showing that they actually own many of the $5 billion in loans currently in default, meaning that judges across the country have already dismissed dozens of the trusts’ lawsuits against students. With flawed or insufficient ownership records, the trusts cannot successfully seek repayment in court, and thousands of people may end up with a surprise reprieve.

The entire $5 billion of loans that are in default right now stand a chance at being basically wiped away.

Yet the massive mishap is just the latest controversy in the troubled student loan market, which often preys on vulnerable borrowers like students enrolled in for-profit schools and those from less-educated backgrounds. The private student-loan market within that is even more problematic: National Collegiate’s loans were all originally made to students from dozens of different banks that sold them in bundles to investors through securitization; none of the loans are guaranteed by the federal government.

As poorer students struggle with debt they might never actually make enough to pay back, it’s a situation that skirts dangerously close to that of the 2007 subprime mortgage crisis.

The messy paperwork may be something of a miracle for burdened students, but it is a nightmare for the thousands of borrowers who are currently in the middle of the storm, unable to get answers about the state of their loans. For the economists who have long been worried about the US’s impending student-loan crisis, it’s even worse.