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Why missing paperwork may eliminate billions in private student loans

Looking back, one of the more shocking aspects of the not-so-distant subprime mortgage crisis was that billions of dollars in loans were ultimately thrown out by courts in collection actions owing to the fact that lenders simply couldn't provide the necessary documentation.

While you would naturally think something like this would prove to be a historical anomaly, recent reports indicate that it's actually happening all over again. This time, however, it does not relate to mortgage debt, but rather private student loan debt.

For those unfamiliar with private student loans, they differ from their federal counterparts in that they typically carry steep interest rates that can reach double digits and relatively few consumer protections.

Over the years, thousands of individuals with private student loans who were unable to make payments saw themselves hit with collection lawsuits filed by the many trusts owning the underlying debts.

Unfortunately, lacking the time, energy or resources to fight, many of these borrowers often failed to appear in court, meaning the trusts would secure default judgments enabling them to garnish wages and other sources of income.

Interestingly enough, however, as more affected individuals have elected to go to court in recent years, it's become increasingly apparent that many of the trusts holding these private student loans are actually lacking the paperwork needed to demonstrate that they own them.

This is attributable to a phenomenon known as securitization, whereby private student loans made over a decade ago by many different banks were bundled together and sold to investors. Experts indicate that as the private student loans passed from financial entity to financial entity, vital paperwork demonstrating ownership of the loans vanished.

Accordingly, courts across the nation have been increasingly dismissing dozens of collection lawsuits against debtors, essentially erasing their private student loan debt.

One of the key figures affected by this development has been an entity known as National Collegiate Student Loan Trusts, which is comprised of 15 different trusts that collectively hold $12 billion spread out over 800,000 loans. These trusts have proven especially aggressive in pursuing defaulting borrowers over the years, filing tens of thousands of collection lawsuits over the last five years.

It will be interesting to monitor just how many of these delinquent private student loans -- which add up to close to $5 billion -- are wiped away in the months and years ahead owing to missing documentation.

Stay tuned for updates …

Please remember that if you are experiencing significant financial problems despite your best efforts, you are not without debt relief options.    

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