Paperwork Errors Could Wipe Out $5B in Student Loans

One of the biggest holders of private student loans appears to have flunked Bookkeeping 101—and that could be very good news for a lot of borrowers. The National Collegiate Student Loan Trust, a group of 15 trusts holding 800,000 student loans worth around $12 billion, has been pursuing borrowers in court, but case after case is being tossed out because the trusts have been unable to produce paperwork proving they actually own the loans, the New York Times reports. Lawyers say that since the loans generally passed through many hands before reaching National Collegiate, the paperwork involved is so shoddy that it could affect most of the $5 billion of its debt that is in default.

Some borrowers say the company has sued them trying to collect on high-interest loans that they never even took out. National Collegiate has been going after old debts so aggressively that Bloomberg dubs it a "lawsuit machine," though lawyers say that since most debtors who are sued either pay up or ignore the summons, resulting in a default judgment, the company tends to back off in the relatively rare cases when debtors go to court. But such cases may become more common: "As news of the servicing issues and the trusts’ inability to produce the documents needed to foreclose on loans spreads, the likelihood of more defaults rises," the company's lawyers warned in a recent filing. (More student loans stories.)