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Will Student Loan Debt Cause the Next Financial Crisis?

The following post is part of our Law Student Blog Writing Project, and is authored by Raphael Jackson, a law student from the Chase School of Law.

According to a recent New York Times article, at least $5 billion are at stake in a protracted legal dispute between student borrowers and creditors. At the center of this dispute is an organization called the National Student Loan Trust (NCT). The NCT is an umbrella organization of fifteen trusts. Having purchased nearly 800,000 student loans, the NCT is one of the largest owners of private student loan debt in the United States. The way the NCT works is that it buys private student loans then subcontracts to collection firms to file lawsuits in U.S. Courts.

Statistics from the student-loan financing website Make Lemonade indicate that 11% of students default on their student loan debt. Private lenders lack many of the powers afforded to federal lenders, such as interception of tax refunds, garnishing of social security benefits, or other seizures of federal income revenue. Therefore private lenders must rely almost exclusively on lawsuits in order to collect on debt. Although the NCT isn’t the only loan purchaser which takes its borrowers to court, NCT is considered to be the most litigious among them. According to the New York Times the NCT files an average of four lawsuits per day throughout the U.S.

Essentially NCT is in the business of purchasing debt, which is also known as securitization. Mass securitization is not an uncommon practice. However, because they purchased the loans in bulk from various private lenders, NCT often cannot provide an unbroken chain of title which links the borrower to the debt actually owed. As a result of this discrepancy, many judges are dismissing NCT cases in court.  Once a case is vacated in the court the borrower is no longer on the hook for the amount the creditor claims he or she owes.

What this means is that if you are one of the 800,000 former students whose student-loan debt is owned by the NCT, it is possible that your debt may be wiped clean.

How can you beat a law suit to collect on a student loan?

Transworld is the agency that NCT hires to collect their debt and take the consumers to court. According to a review conducted by the New York Times, the lawsuits brought about by the NCT/Transworld are failing in court due to their inability to prove ownership documents. This problem is similar to that which was caused by the ‘robo signing’ which plagued the subprime mortgage crisis of last decade. Attorney Robin Smith of the National Consumer Law Center commented “This is robosigning 2.0 with student loans...You have securitized loans in these large pools; you have sloppy record keeping,” as in the mortgage crisis.”

Federal loans afford a measure of protection to the consumer through income based payment plans, and the ability to discharge the loan in the event that the borrower’s school was closed down due to fraudulent dealings. Private loans on the other hand do not afford such protections to the consumer, furthermore the double digit interest rates, which balloon over time, can leave the borrower to pay hefty monthly sums which are unaffordable to most borrowers.

How do I know if I’m being sued for student debt?

You know you are being sued for the debt if you have received a summons and complaint in the mail. Once you received this summons and complaint from a court you have twenty days in Kentucky to answer it, or twenty-eight days in Ohio. If there are other defendants listed on the lawsuit they are probably your co-signers, who may be equally liable in court. To fail to respond to a summons within the thirty day time frame is to grant your lender a default judgment in court.

Traditionally many debt collectors relied on the default judgments they would receive by defendants’ who either ignored summons or quickly agreed to payment settlement terms. NCT typically puts out lawsuits within 6-12 months of the borrower’s default on the loan. Therefore, whether or not you intend on seeking professional assistance from an attorney be sure to mark your calendar. Once you receive the summons the clock on your lawsuit begins ticking.

Is it always in my best interests to quickly settle?

Some consumers arrange with law firms to make a settlement. What the debt collector is seeking is usually a “consent of judgment” along with an agreed upon monthly payment schedule. Keep in mind that once you sign you are consenting that you are legally liable for the debt. Before you have explored all of your legal options or verified the amount you actually owe, rushing into a settlement may not always be the best strategy. You may be one of the 800,000 consumers who has an affirmative defense. With the assistance of an attorney at the very least, with you may be able to work out a better settlement.

An affirmative defense is additional evidence which negates civil liability even if the initial charge can be proven. One typical affirmative defense is the statute of limitations. In the commonwealth of Kentucky, creditor’s generally take the position that the lawsuit must be filed within five years. In the state of Ohio, the statute of limitations on suing for student loan debt, or debt of any kind, is generally six years.

Finally, the NCT must show actual proof of the debt that you owe. This proof should be in the form of a loan agreement between you and the lender. Oftentimes in cases where the lender possesses some paper work evidence, the exact amount still may be in dispute.

If the collection agency has run the statute of limitations, they are still attempting to collect on the debt in spite of not having the proper documentation, this company may possibly be in violation of the Fair Debt Collections Act.

If you have been sued by your student loan provider, or you believe there is a discrepancy between the amount you owe and the amount that your lender is seeking to collect, contact an attorney as soon as possible for a free consultation.