Student loan forgiveness: Could your debt get waived because of missing paperwork?

If you’re going to bring someone to court because they owe you money, you’ll need to bring the receipts. That’s perhaps doubly true for private student loan servicing, as recent scandals involving predatory lending and for-profit schools have led to an outcry for greater consumer protections for borrowers.

Indeed, one of the country’s largest owners of private student loans appears to have been suing distressed borrowers — without being able to provide the proper paperwork, a New York Times investigation of court records has found.

As a result, about $5 billion or more in student debt belonging to tens of thousands of borrowers could end up being erased by judges who hear the case. According to a 2015 audit of the owner in question — National Collegiate Student Loan Trusts — not a single loan out of 400 in the sample was backed up by the required documentation.

“National Collegiate is by far the number one private company pursuing these lawsuits.” Stanley Tate, a St. Louis-based attorney specializing in student loan cases, said in a phone interview. “They probably have the largest portfolio of private loans in the country.”

The law could work in your favor as a student borrower: Tate explained that business records are typically treated as hearsay during a trial, meaning that simple “out of court” statements are not typically admissible from plaintiffs. A “business records exception” does allow business documents to be admitted if one can prove a proper foundation for the document’s admissibility — but as Tate put it, the plaintiff suing you would need to be able to provide “someone who knows how the records were maintained.”

“I have about 23 cases right now that I’ve handled in the past two years,” Tate said. “I’ve never had them actually produce a witness.”

Kevin Thomas, of the New York Legal Assistance Group, said in an interview he helps handle about 200 cases involving lenders missing paperwork each year in his capacity with the organization’s “Volunteer Lawyer for A Day” program. He estimated that between 10% and 20% of all of his cases fit this bill.

“It’s a break in the chain of custody,” Thomas said of these cases. “It’s like you have a murder weapon and you cannot show how it went from the crime scene all the way into evidence.”

One reason owners of student debt may have a hard time proving ownership has to do with a process called securitization, which is when financial institutions take consumer debt and repackage it into an asset investors can buy and sell. To facilitate the trading of student debt-based securities, loans are often packed into trusts. National Collegiate, for example, owns 15 trusts that cover some 800,000 individual loans. Beating such trusts in court isn’t particularly difficult, Thomas said, because in many circumstances paperwork is missing since the borrower has never done direct business with the trust controlling their debt.

“In order to prove that the trust has standing, they have the right to prove they are the one damaged,” Williams said. “They have to show the account going from one entity to the other and then from that entity into the trust.”

It’s hard to say how many owners of debt will be able to meet this high bar, but the Times found that judges in several other states besides New York — including New Hampshire, Texas and Ohio — have recently sided with borrowers.

Thomas said that despite these developments, the student loan industry’s predatory tactics remain a big problem, particularly when vulnerable borrowers are targeted — since subprime loans tend to pay a higher return. “They’re giving these loans out to everyone and anyone knowing they’ll get some money,” Thomas said. “And it’s very unethical to do this.”

Alas, one challenge for borrowers is that proving your lender doesn’t have the required paperwork does mean seeing them in court — which is expensive and risky, Tate said. After all, you might lose. “There’s no safe way to do this,” he said. “There is paperwork out there, and what happened for some people isn’t necessarily going to happen to you.”

If you’re having trouble making your student loan payments, your best option is not to stick your head in the sand. First deal directly with your servicer: Explain your situation and request a lower monthly payment you can actually afford. Generally, Tate said they’ll work with you — and with a federal loan, they’re legally required to cap your payments at a certain percentage of your income.

If you have student loans through a private lender, you have fewer options, though unlike with federal loans, a private lender can’t garnish your wages without a judge’s ruling first, Thomas noted.

Another move you can make? There are strict rules regarding why — and how often — a debt collector is allowed to call you. Thomas said that in most cases, you should be able to get a creditor to stop pestering you by filing a cease and desist letter. Thomas also said how often a debt collector calls you could actually be a clue as to how you’d fare in court: “Especially when they know that whatever they’re trying to collect, they don’t have the standing to collect it,” Thomas said, “they will be more aggressive in trying to get you to settle.”

Finally, both Thomas and Tate recommended requesting proof of the loan ownership first, and then bringing what you find to an attorney in your own jurisdiction to see what your chances might be of successfully contesting the loan in court. Here is Mic’s guide to finding a lawyer that you can trust. And for more help figuring out if your loans are linked to National Collegiate, Money has a helpful piece.

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July 18, 2017, 5:50 p.m. E.S.T.: This story has been updated.