Many borrowers with student loan debt may have just received an unexpected gift. As reported by the New York Times, a paperwork snafu may potentially relieve thousands of people from the obligation of paying off their private student loans.
This potential dream scenario for borrowers stems from one company, National Collegiate Student Loan Trusts, a very large owner of private student loans. The company is an umbrella company for 15 trusts that hold 800,000 private student loans totaling $12 billion.
The loans in question here, estimated at $5 billion or more, are in default, meaning the borrowers fell behind on their payments. As a result, the accounts were turned over to collection agencies. In some cases where the money was not recovered with typical collection tactics, National Collegiate filed lawsuits against the borrowers.
To date, dozens of these lawsuits filed by National Collegiate Student Loan Trusts against borrowers have been dismissed by judges due to insufficient or unclear proof of ownership of the debt, commonly referred to as chain of title. Any company trying to collect on debt payments must be able to document it is actually owed the money. This is an important legal protection to safeguard consumers from being caught in the web of their loan being bought and sold by investors (through a process known as securitization) without adequate documentation of the originator of the loan, payment history, outstanding balance, etc.
What does this mean for student borrowers?
For those who have had or will have their student loan debt dismissed because of this situation, it's almost as good as winning the lottery. The debt vanishes along with the stress of an unmanageable monthly payment, collectors and court. The situation of inadequate documentation resulting in dismissed debt is not new, but is very unusual at this scale. Hundreds of these cases have been dismissed thus far, but it is difficult to estimate how many more borrowers might see their debts wiped out due to fragmented reporting from local courthouses for the cases on the docket.
Will removing this debt improve credit scores for these borrowers?
Undoubtedly, yes. The original delinquency will still show on the borrower's credit report, which does have a negative effect on their credit score. But removing the outstanding debt will reduce the borrower's overall credit utilization which will have a positive effect on his or her credit score.
How Bad is the Student Loan Debt Crisis?
A recent Experian analysis showed that outstanding student loan debt per student borrower has increased. It has grown 15% over the last four years, with the average student loan balance a whopping $32,000. This includes both private and federally insured student loans. The overall total of outstanding student loan debt was $1.49 trillion in the fourth quarter of 2016. Yes, that's trillion with a "T". This is an increase of 21% since 2013.
These are big numbers, but it does need to be taken in context. Education is clearly an investment, and a college degree is the low bar for many jobs. The unemployment rate for Americans with a bachelor's degree was 2.7% in 2016 vs. 4.4% for those with some college but no degree and 5.2% for those with only a high school diploma, according to the Bureau of Labor Statistics.
That said, a recent NY Fed study showed that nearly one-third of U.S. college graduates are working in jobs that don't require a college degree — even if having the degree helped them land it in the first place.
In other words, taking out a student loan is not a cut-and-dried decision. But as long as a student loan is carefully evaluated along with your earnings potential and a manageable payback plan, it can be an investment in your future.
Student loan advice
Just as any financial management decision, do your research before making a decision. Generally, federal student loans have lower interest rates and some have income-based payment plans to make the monthly payments more manageable. Also, look for loans with low annual percentage rates (APR) available at sites like Student Loan Hero.
Lastly, always keep in mind not to bite off more than you can chew. Beyond the very unusual story happening with National Collegiate Student Loan Trusts, student loans need to be paid back. Along with getting a job that college has prepared you for, paying off your student loans needs to be a part of your post-graduation plan.