Paperwork issues may wipe out $5 billion in student loans

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Owners of loans apparently having trouble proving it

The total amount owed on student loans in the U.S. hovers around $1.3 trillion, but a sizable chunk of that debt might suddenly disappear.

If it did, it would mostly affect those students who have struggled the most to pay it back.

The New York Times reports the student loans in question are private loans, mostly made by banks, that have been sold to investors. The Times reports a review of court records indicates that judges have already dismissed dozens of lawsuits brought by the owners of the loans against former students who have defaulted.

The reason? There are said to be significant gaps in the paper trail establishing who exactly owns the loans. According to the newspaper, as much as $5 billion in private student loans might simply be declared invalid, meaning the former students would owe nothing.

National Collegiate Student Loan Trusts

Lendedu, which covers the student loan industry, reports one of the biggest owners of the troubled loans is National Collegiate Student Loan Trusts, a single organization made up of several trusts. In a recent court filing, the Trusts noted that it has already lost numerous court cases based on the position that it cannot prove ownership of the loan -- a position it disputes and declares to be unfair.

"For example, this year, the Ohio Court of Appeals overturned a judgment in favor of the Trusts because the Trusts neglected to include documentation to prove that it is entitled to demand judgment of the note," the document stated.

The court filing requested the right to audit the Pennsylvania Higher Education Assistance Agency to find needed documentation for some loans. It also warned that as news spreads of the documentation issue, the likelihood of further defaults will rise.

Total loans worth $12 billion

Lendedu reports National College Student Loan Trusts is composed of 15 trusts that hold a combined total of 800,000 private student loans. Those loans could be worth $12 billion, and Lendedu says more than $5 billion of that debt is in default.

If all of this sounds vaguely familiar, private student loans are often treated the same way subprime mortgages were before the financial crisis. Then, these mortgages were sold by the lenders to investment banks who turned them into securities and sold them on the market. Roughly the same model is used for private student loans.

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