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How These Student Loan Borrowers Are Getting Their Debt Dismissed in Court

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Student debt is only forgiven or discharged in special cases, but a new report by The New York Times might offer a glimmer of hope to some student loan borrowers struggling to manage their debt.

If a student loan lender or servicer can’t prove that they own the debt that they are attempting to collect from a consumer, it’s possible that the debt can be dismissed in court.  That’s what happened in a recent case profiled by New York Times reporters Stacy Cowley and Jessica Silver-Greenberg involving private student lender National Collegiate Student Loan Trusts, one of the nation’s largest owners of private loans.

National Collegiate sued dozens of former students who had defaulted on their private student loans. But in court National Collegiate failed to prove they owned the loans. This happens often when loans are sold to another lender, or otherwise handed to another account manager and paperwork gets lost. Ultimately, the courts dismissed the lawsuits, citing the fact that National Collegiate had no way of proving they owned the debts in the first place.

This isn’t always how the scales tip in cases against consumers for unpaid debts.

If consumer debts are left unpaid for an extended period of time, consumers can and often are taken to court by the companies they owe. Often, consumers don’t answer these lawsuits at all. And when lawsuits aren’t answered, judges usually rule in favor of the plaintiffs. With those judgments in place, companies can then push to have the consumers’ wages or federal benefits like Social Security garnished.

The outcomes in these National Collegiate lawsuits are proof of what can happen if consumers simply show up at court and try to fight back.

“Individuals trying to get rid of student loan debt should be proactive in demanding proof of ownership of the loan documents from the lender that is collecting or trying to enforce the [loan],” says Attorney Evelyn J. Pabon Figueroa, based in Orlando, Fla.

People who are going through the bankruptcy process and are attempting to have student loan debt discharged should also ask their lenders for proof that they own the debt, Figueroa says. If proof isn’t provided, they should dispute the debt.

Figueroa says in some cases borrowers should even stop making payments if they believe the lender doesn’t have the right documents to prove they own the loan. Instead, send the lender a debt verification letter, which asks lenders to provide proof that the debt belongs to a person. You can download a sample debt verification letter from the Consumer Financial Protection Bureau website.

The CFPB suggests asking these three questions in your letter:

  • Why a debt collector thinks you owe this debt.
  • The amount of the debt and how old it is.
  • Details about the debt collector’s authority to collect this money.

If the lender can’t provide proof, you should consider disputing the debt, either in court (if the lender has filed a lawsuit against you at that point) or through the three major credit bureaus (if the debts are appearing on your report and subsequently hurting your credit score).

How student lenders lose track of their debts

If the National Collegiate debacle sounds familiar, it should. It’s similar to the same issues mortgage lenders encountered during the 2008 subprime mortgage crisis. Lenders took borrowers to court to pursue unpaid mortgage debts, but when the lenders could not provide proof that the borrowers owed the debt, courts often ruled that the loans were not collectible. The lack of documentation was so pervasive that many borrowers intentionally defaulted on their mortgage loans on the off chance a lender could not prove they owned the debt.

National Collegiate is already anticipating that it will face the same problem — that borrowers will simply stop paying their debts — as word spreads of its inability to win lawsuits against borrowers. “[A]s 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 said in a recent legal filing.

What to do if you’re sued by a student lender or debt collector

First, don’t panic. The last thing you want to do if you’re ever sued is admit in writing or verbally that you owe the debt. In the event the lender can’t prove they own the debt, this may come back to haunt you. By taking these few key steps, you can protect yourself both legally and financially in the event you’re served with a lawsuit from a lender:

  1. Ask them to verify the debt. If you’re already suspicious your loan lender may have lost your paperwork and can’t prove the debt, start by sending out a debt verification letter. If the lender doesn’t respond (give them 30-60 days), they must cease attempting to collect the debt. If they don’t stop, you’ll likely need to contact a lawyer. You may not need to hire one, but a quick consultation for legal advice for your best course of action will be well worth it.
  1. Never discuss the debt over the phone. If a lender or collection agency contacts you via phone before you are served a lawsuit or receive anything in the mail, be sure to get the caller’s name, company, and license number. Once you have this information, it’s best to communicate via certified USPS mail to track and document that every correspondence has been received by the legitimate collections company and lender. If you end up in court, this is important, as it establishes a paper trail for your communications. (Email and electronic timestamps can easily be forged.) Keep in mind you don’t ever have to answer the phone if you don’t recognize the number, and you have a legal right to tell debt collectors to stop contacting you entirely.
  1. Contact a lawyer. Lawsuits involving large sums of money are no small game to play in a courtroom. Most consumers don’t know the intricacies of the laws that actually protect them (and sometimes may not know how to read the contracts they signed), but a lawyer versed in contract law or one who specializes in bankruptcy can easily help dispute the debt and, if it’s valid, negotiate a settlement without ever stepping into a courtroom. The CFPB keeps a handy list of legal aid groups so you can find an affordable lawyer in your state.

 

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Kelly Clay
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Kelly Clay is a writer at MagnifyMoney. You can email Kelly here

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News

Federal Student Loan Rates to Ease Back Down for 2019-2020

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews, statements or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

After back-to-back increases in the previous two summers, interest rates for federal student loans are headed lower for the coming year.

Congress sets federal student loan rates each spring, based on the yield of the benchmark 10-year Treasury note, and the new interest rates go into effect on loans disbursed from July 1 onward.

While the Department of Education had yet to post the new rates on its site, news reports put the decreases for July 2019 to June 2020 as:

  • Undergraduate Direct Subsidized and Unsubsidized Loans: 4.53% (down from 5.05%)
  • Graduate Direct Unsubsidized Loans: 6.08% (down from 6.6%)
  • Graduate PLUS and Parent PLUS Loans: 7.08% (down from 7.6%)

Federal loan interest rates last declined in July 2016, with the undergraduate direct loans falling by about half a percentage point to 3.76%, for example.

Federal student loans also come with loan origination fees, but those generally change in October. For the 2018-19 period they were:

  • Undergraduate Direct Subsidized and Unsubsidized Loans: 1.062%
  • Graduate Direct Unsubsidized Loans: 1.062%
  • Graduate PLUS and Parent PLUS Loans: 4.248%

For more on the true costs of federal student loans, check out our complete guide, including all the various types of loans and strategies for repayment.

This report originally appeared on Student Loan Hero, which like MagnifyMoney, is part of LendingTree.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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