How 1,000s Of Student Loans Worth Billions Are Getting Erased On A Technicality

National Collegiate Funding (NCF) is an umbrella name for 15 trusts that collectively hold 800,000 private student loans, totaling some $12 billion in outstanding obligations.  The only problem is that roughly $5 billion worth of those loans, or over 40%, are currently in default (and you thought auto delinquencies were bad).

Now, ordinarily when a student defaults on their loan, NCF simply files a lawsuit in local or state court as a means for negotiating a settlement or payment plan with the borrower.  Often times, NCF wins these cases automatically as the borrowers don’t even bother to show up for their court date.  In cases like that, NCF can use their court victory to garnish wages and/or federal benefits from entitlement programs like Social Security which can haunt borrowers for decades (we actually wrote about it here:  Baby Boomers Increasingly Having Social Security Checks Garnished To Cover Student Loan Payments).

That said, NCF is increasingly finding that, much like the subprime mortgage debacle from 10 years ago, student lending institutions apparently had a really hard time keeping tracking of paperwork over the years and/or processed deeply flawed contracts with incomplete ownership records and mass-produced documentation (who can forget that whole robo-signing catastrophe).

As the New York Times points out today, student loans, much like mortgages, are often originated at large commercial banks before being sold to numerous other financial institutions and ultimately ending up in a securitization owned by some unsuspecting European pension funds.  And while pooling these student loans in such a complicated way into securitizations apparently magically eradicates all default risk associated with the underlying loans (just ask any 22 year old on the JPM securitization desk and he/she will confirm the same), it also makes it extremely difficult to prove ownership.

Of course, courts generally shy away from awarding judgements to folks who can’t adequately prove they actually own something.  And, as a result, 1,000s of students are finding they can easily get their student loans expunged on a technicality.

Take the case of Samantha Watson, a 33-year-old graduate of Lehman College in New York who fell behind on her student loans primarily because she “didn’t really understand about things like interest rates.”  Luckily, she doesn’t need to invest the time to learn how to multiply by fractions because, when NCF failed to provide adequate ownership records, some $31,000 worth of her student debt was magically erased.

It almost makes you want to sign up for a masters degree, load up on some student loans and head off to Cancun for spring break…it all seems to be working out really well for millennials (see “31% Of College Students Spend Their Loans On Spring Break“).

 

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