Tens of thousands of students struggling with insurmountable student loan debt are about to get a little breathing room.
The National Collegiate Student Loan Trusts, a creditor that holds billions in private student loans, reached a settlement Sept. 18 with the Consumer Financial Protection Bureau (CFPB) in which the trusts were ordered to refund at least $21.6 million toward refunds and penalty fees for affected borrowers.
As MagnifyMoney’s Kelly Clay reported in August, 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.
In the settlement with the CFPB, the trusts agreed to set aside $3.5 million for reimbursements to borrowers who had already made payments after being sued for loans unlawfully. If a student loan lender can’t prove it owns a debt — for example, if it lacks the proper documentation to prove ownership — it can’t legally collect on it. Likewise, if the statute of limitations has passed, the lender can continue to try to collect on the debt, but it can no longer take legal action against the borrower.
Although there are usually limited circumstances under which student loans are forgiven, this ruling may result in many borrowers eventually having their debts wiped out. The CFPB ordered National Collegiate to have each of its 800,000 loans reviewed by an independent auditor, and the trusts will not be allowed to go forward with collection actions on any loans that they can’t prove they own.
“The National Collegiate Student Loan Trusts and their debt collector sued consumers for student loans they couldn’t prove were owed and filed false and misleading affidavits in courts across the country,” CFPB Director Richard Cordray said in a statement.
What does this mean for you?
If you borrowed educational funds from a private lender who sold your debt to the National Collegiate Student Loan Trusts, and you were sued between November 2012 and April 2016, it’s possible you’re due a refund. According to The New York Times, Bank of America and JPMorgan Chase are among the private lenders who sold private student loan debt to the trusts.
StudentDebtCrisis.org, a nonprofit dedicated to higher education funding reform, tweeted: “Thousands of Americans with student debt could see their loans cut under a @CFPB agreement with Wall Street trusts.”
If you’re owed restitution, the company will reach out to you. No action is required on your part. However, if you’d like to make a formal complaint, you can contact the CFPB.
What you can do if you’ve fallen behind on your loan
It can be tough to keep up with your student loan payments. If you’re behind, it doesn’t have to be the end of the world. It takes about nine months (270 days) of nonpayment for a federal student loan to go into default.
But many private student loans default when you are only 120 days late. Sometimes missing one or two payments can send you into default.
So make sure you carefully read your loan contract to better understand what constitutes a default and to know your rights, if you happen to default on your loan.
If you default, don’t panic. While it’s your responsibility to pay what you owe, you have rights, and it is against the law for the debt collector to harass you.
The student loan creditor must provide a written “validation notice” indicating how much you owe, the name of the creditor, what rights you have if you think you don’t owe the debt, and how to obtain information about the original creditor.
You may have options for setting up a repayment plan. Familiarize yourself with the terms of your loan and contact the CFPB if you have concerns about the practices of your lender.
‘I defaulted, and I’ve been sued. Now what?’
If you default on your loan and you’ve been sued, it can be stressful, but don’t give up. You’ve not automatically lost just because the creditor has taken legal action.
Here are four steps to take if you receive a summons.
Stick to the deadlines.
If you ignore the summons or don’t show up in court, this may result in a default judgment against you.
Verify your debt.
Is the amount correct? Is the debt valid? If there’s any discrepancy between what your records show and what the credit agency is alleging, you need to document that.
One way to do that is to send your lender or debt collector a debt verification letter. This is a formal way to ask them to verify the amount, that you are the owner of the debt, and that it’s valid. If they don’t respond to the letter within 30 to 60 days, they must cease attempting to collect the debt.
Know your rights.
Unlike federal student loans, private loans are bound to a statute of limitations. Once that statute of limitations has run out, the lender can no longer take legal action. But that doesn’t mean they’ll stop trying to collect on that debt. And that’s where you should be careful. If you pay even $1 toward an old debt after the statute of limitations is up, it automatically restarts the clock, and the lender can once again take legal action. Find out what the statute of limitations is in your state.
You have a legal right to tell debt collectors to stop contacting you entirely.
If all else fails, hire an attorney.
Hopefully you won’t need one, but every situation is different. If you don’t have the money to pay your student loans, chances are you don’t have the money to pay a lawyer.
But if you find yourself in a situation where you really need someone to simplify the complexity of your case and speak to a creditor on your behalf, you may consider consulting a student loan attorney. Private loans are subject to state law, and a licensed attorney may be the best person to help you navigate those waters. The CFPB has a tool that can help you find an affordable lawyer in your state.
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