If you took out private student loans for college, your debt might be part of the $5 billion wiped out by a legal technicality, according to a recent news story.
But is it really that simple?
The reality is that these loans might not be canceled. Even if you “win” against a private student loan collection attempt in court, you still technically owe the money – and that could have its own consequences.
Here are the facts you need to know about what’s going on with this $5 billion private student loan forgiveness story.
Student loan borrowers fighting lawsuits
It basically comes down to lost paperwork. The drama revolves around student loan borrowers fighting lawsuits brought by National Collegiate Student Loan Trusts. In some cases, when the borrower shows up to fight the lawsuit, it becomes evident that National Collegiate can’t prove a clean ownership of the debt, the lawsuit is dismissed. They “beat” the student loan Goliath.
“National Collegiate is a collection of dozens of individual trust entities that purchased private student loan accounts,” explained Adam S. Minsky, an attorney specializing in student loan law. “In some cases, the accounts have changed hands several times during the securitization process so the paper trail gets fuzzy.”
There are instances of the papers “proving” ownership being nonspecific as to which loans were actually transferred. (You can see an example here.) That sort of documentation might not hold up, depending on state law – and how a judge interprets it.
Some states require a very clear chain linking the student loan debt back through various owners to the borrower. “You need to have loan documents with terms and signature, as well as a clear paperwork chain showing how the rights passed from the original lender down to them through however many intermediaries in some states,” Minsky said. “If it can’t be proved, the debt is unenforceable.”
For debt collectors looking to get paid, it’s a numbers game. “If you are sued for payment on your private student loans and don’t show up, you automatically lose,” said Minsky. “Entities like National Collegiate are hoping most borrowers don’t challenge them, and they can get the judgment they need to take other steps to get the money from you, including wage garnishment.”
Unenforceable student loan debt vs. canceled debt
The news now is that some borrowers are showing up and fighting back. And since National Collegiate can’t meet the burden of proof needed to convince a judge they should be allowed to pursue payment on certain private student loans, repayment becomes unenforceable.
But, Minsky explained, unenforceable isn’t the same as canceled.
In most of the cases where borrowers “win” against creditors like National Collegiate, said Minsky, the debt becomes unenforceable. It’s not actually canceled or forgiven. The debt is still exists somewhere — creditors involved just can’t force you to pay it.
Even if the lawsuit is dismissed, Minsky warned, it might not be over. Some states allow you to be sued again if they do it within a certain timeframe. You need to wait until the statute of limitations has passed if you want to breathe your sigh of relief. It also depends on the type of dismissal. Not all some dismissals are final, while others are not.
Additionally, rather than suing you, there are cases in which a creditor will offer to settle the debt with you, according to Minsky. You might reach an agreement where you pay back pennies on the dollar of what you owe. It’s not the same as avoiding payment altogether, but it can ease the circumstances so that your debt repayment is manageable.
It’s even possible to settle during the course of a lawsuit. “Sometimes this can be a very good outcome for borrowers,” Minsky said. “Sometimes it could be cheaper than continuing to defend the case.”
Minsky said that while some borrowers receive a court-ordered cancellation of the private student loan debt, it’s far from a common occurrence. “By and large, these borrowers aren’t receiving forgiveness or cancellation,” he reiterated. “They are just being told National Collegiate can’t collect on the debt. I have never seen a court-ordered cancellation of a student loan outside bankruptcy court.”
So, if the debt is still there, what happens to your finances?
‘Winning’ in court — but losing in credit
One of the issues Minsky sees with all the hype surrounding the current news story is that it ignores the credit consequences. Since you are being sued for non-payment, the default likely already appears on your credit report. Getting it off your credit report doesn’t happen automatically if a lawsuit against you is dismissed.
Even if you “win” your court battle by having the lawsuit thrown out, the student loan debt can still haunt your credit report. It’s been reported as a default already. Minsky said a default can remain on your report and impact your credit score to some degree for up to seven years.
A settlement won’t guarantee the best credit outcome, either. “If you come to an agreement with the creditor to make smaller payments, it will be listed as a settlement on your credit report and remain there until it drops off,” Minsky said.
The only way to have the debt removed from your credit report is to take it up with the major bureaus. “If you can convince the credit bureau that the court decision means the debt should be removed, you can reduce the impact on your credit score,” Minsky said. “But it’s a long shot.”
How to fight a private student loan debt collector in court
If you do find yourself sued over your private student loans, the most important thing you can do is contact a lawyer, said Minsky.
“States have different laws about how long you have to file a proper response,” he said. “If you miss the deadline, or you file an improper response, you lose. A lawyer can help keep you on track with what you need to know.”
Minsky said that during the discovery process, a lawyer will ask for the paper trail. This is where you have the chance to prevail. If the documentation is unsatisfactory in proving that the collector owns the debt, the court can throw out the case.
However, Minsky pointed out that you can’t just ask for this information. “The rules can be very specific and variable,” he said. “It’s not like you can pick up the phone and demand it.”
For the most part, though, Minsky said it’s worth challenging a collector if you are sued.
“No one is going to get automatic forgiveness, so you don’t want to default on your private student debt just to see if you can take advantage of this situation,” he said. “However, if they come knocking at your door over an alleged default, definitely consult with a lawyer and make them prove that they own the debt.”
Talk to a student loan specialist
So, don’t celebrate just yet.
Before you let your student loans lapse into default because you think your debt will be wiped away, contact your servicer to find out what your options are. You might be eligible for a more manageable payment plan, forbearance, or deferment.
Although it’s nice to think that you might beat the big guys, you still don’t want to let your credit suffer. It might be best to review your options with a knowledgeable student loan specialist to come up with a repayment plan that works for you.
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