NYT: Missing Paperwork May Erase $5 Billion in Student Loan Debt

Missing paperwork reportedly may ultimately erase $5 billion dollars of debt for loans that tens of thousands of former students took out over a decade ago.

National Collegiate Student Loan Trusts — a 15-trust company that purchases private student loan debt — reportedly lost the paperwork documenting these loans’ chains of ownership, according to cases brought forward in Pennsylvania and Delaware, the New York Times reported.

The shoddy record-keeping means that if the trust tries to come after students who default on them, they may see the entire debt written off. Judges have dismissed dozens of lawsuits against borrowers who defaulted on student loans from private creditors, the Times reported.

“A review of court records by The New York Times shows that many other collection cases are deeply flawed, with incomplete ownership records and mass-produced documentation,” thew newspaper said.

The trust bought the loans from the banks which granted them originally and not all of the paperwork clearly states who can now rightfully demand payment, the Times reported.

The trusts win many of the lawsuits they file automatically, because borrowers often do not show up to fight. Those court victories, which can be used to garnish paychecks and federal benefits like Social Security, can haunt borrowers for decades.

However, “judges throughout the country, including recently in cases in New Hampshire, Ohio and Texas, have tossed out lawsuits by National Collegiate, ruling that it did not prove it owned the debt on which it was trying to collect,” the Times reported.

The $5 billion accounts for roughly 160,000 loans worth around $30,000, the national average, the Times reported.

“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,” the Times reported.

Meanwhile, despite a record-high U.S. stock market and a positive economic outlook, U.S. parents spent less on college tuition during the 2016-17 school year, according to Sallie Mae's 10th annual "How America Pays for College" report.

Out-of-pocket spending by parents fell to 23 percent from 29 percent of the average amount the typical family pays for college, according to a survey released Monday. That translates to about $5,527 out of the average $23,757 yearly tab, Reuters reported.

That's the lowest dollar amount spent by parents since 2009, as well as the smallest percentage of the total tuition spent since the study started.

Much of the difference was made up by a big jump in student borrowing to 19 percent of the total, from 13 percent.

To be sure, college tuition hikes and the resulting increase in student debt burdens in recent years have caused a significant drop in homeownership among young Americans, according to new research by the Federal Reserve Bank of New York.

The study is the first to quantify the impact of the recent and significant rise in college-related borrowing—student debt has doubled since 2009 to more than $1.4 trillion—on the decline in homeownership among Americans ages 28 to 30. The news has negative implications for local economies where debt loads have swelled and workers' paychecks aren't big enough to counter the impact. Homebuying typically leads to additional spending—on furniture, and gardening equipment, and repairs—so the drop is likely affecting the economy in other ways, Bloomberg reported.

(Newsmax wires services contributed to this report).