There was a news article going around this week that had a shocking headline – due to lost paperwork, billions of dollars in private student loans might be forgiven or cancelled. This article, published first in the New York Times, was picked up by other media outlets across the country and shared repeatedly on social media. Student loan forgiveness is, after all, big news.
Except, it’s just a little bit more complicated than that. Sorry to be the bearer of a tough reality check, but we all need to take a deep breath and take some time to learn about what’s really going on here.
Here’s my analysis.
What’s the Story About?
The original news article focused on an entity called National Collegiate Student Loan Trust, also known as National Collegiate Trust or “NCT” for short. NCT is actually a collection of dozens of individual trust entities that purchased millions of securitized private student loans from various commercial lenders in the mid-to-late 2000’s. NCT is one of the most litigious private student loan holders, at least in my own experience, and frequently sues student loan borrowers who have defaulted on these loans. Sometimes, in the course of those lawsuits, NCT has trouble producing the appropriate records to prove in court that they actually own the loan that they’re trying to collect on. Without being able to prove ownership, they might not have a case.
Great! So National Collegiate Trust is Cancelling Student Loans?
No. Neither NCT nor any other private student loan lender is simply cancelling a bunch of private student loans.
Some background here. If you stop paying on a student loan, that loan can go into default status, meaning the student loan contract has been broken. The lender can then sue the borrower in court for failing to make payments and breaching that contract. When NCT (or any other student loan lender) sues a defaulted student loan borrower, their goal is to obtain a judgment – a court order confirming that the borrower must repay NCT for the loan. However, borrowers have a right to defend themselves by disputing the loan and asking the lender to produce records through a formal process called discovery.
In the end, if the lender provides insufficient records, then it might not be able to obtain a judgment, and the lawsuit might get dismissed. In other cases, though, the lender might provide sufficient proof to prevail in a lawsuit and obtain the judgment they are looking for. In still other cases, the evidence might be more murky, and so the lender and borrower might agree to a settlement to avoid the costs and risks of taking the case all the way to trial. The specific outcome for any case can depend on a variety of factors including the specific evidence and documentation produced; the applicable state law and relevant legal standards; and the specific court that the case is in, including who the judge is.
But there are some key points here: this issue doesn’t really come into play unless (1) the borrower is in default on his or her student loans, (2) the student loan lender sues the borrower in court, (3) the borrower raises the appropriate defenses to that lawsuit, and (4) the borrower prevails and the suit gets dismissed, or the parties agree to a settlement.
So, if the Lawsuit Gets Dismissed, Then the Loan is Forgiven?
Nope. A dismissal of the case does not mean the loan gets cancelled, it just means the lender cannot obtain a judgment. The inability to obtain a judgment from a court may effectively make the debt “unenforceable” or “uncollectible,” but it does not make the debt disappear. For example, the debt may continue to be reported to credit bureaus as an outstanding collections account.
On the other hand, if the parties agree to a settlement, usually a portion of the loan gets cancelled once a settlement has been paid.
Should I Stop Paying My Private Student Loans?
No! Defaulting on your student loans can have very serious and long-term repercussions, and there’s absolutely no way to know whether or not you will have a viable defense to a future collections lawsuit. And even if you do have a solid defense, you could wind up in an unfavorable court or before an unsympathetic judge. There are just too many variables that you have no control over. Bottom line here is that no one should be deliberately defaulting on their student debt in the hope that it will be cancelled following litigation. That is a very risky path to take.
