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New York Attorney General Eric T. Schneiderman has opened an investigation into the collection practices of the National Collegiate Student Loan Trusts, one of the nation’s largest owners of private student loan debt, the New York Times reported today. The attorney general’s office sent subpoenas on Wednesday asking for information on every collection lawsuit filed by National Collegiate’s trusts against New York residents. National Collegiate’s trusts have aggressively pursued in court borrowers who fall behind on their student loan payments. An article this week in the New York Times drew attention to the trusts’ inability in many of those lawsuits to produce the paperwork needed to prove that the trusts own the debts they seek to collect. Judges around the country have dismissed dozens of cases filed by National Collegiate’s trusts because of flawed or missing paperwork. The 800,000 private student loans that National Collegiate owns, totaling more than $12 billion, were originated a decade or more ago by other lenders, then packaged into securities and sold to investors. As the debt changed hands, crucial paperwork documenting the loans’ ownership appears to have been lost, according to court filings in a bitter legal fight among parties involved in operating the trusts.

Tens of thousands of people who took out private loans to pay for college but have not been able to keep up payments may get their debts wiped away because critical paperwork is missing, the New York Times reported yesterday. The troubled loans, which total at least $5 billion, are at the center of a protracted legal dispute between the student borrowers and a group of creditors who have aggressively pursued them in court after they fell behind on payments. Judges have already dismissed dozens of lawsuits against former students, essentially wiping out their debt, because documents proving who owns the loans are missing. A review of court records by the New York Times shows that many other collection cases are deeply flawed, with incomplete ownership records and mass-produced documentation. At the center of the storm is one of the nation’s largest owners of private student loans, the National Collegiate Student Loan Trusts. National Collegiate is an umbrella name for 15 trusts that hold 800,000 private student loans, totaling $12 billion. More than $5 billion of that debt is in default, according to court filings. The trusts aggressively pursue borrowers who fall behind on their bills. Across the country, they have brought at least four new collection cases each day, on average — more than 800 so far this year — and tens of thousands of lawsuits in the past five years. Judges throughout the country, including recently in cases in New Hampshire, Ohio and Texas, have tossed out lawsuits by National Collegiate, ruling that it did not prove it owned the debt on which it was trying to collect.

Wiping out student loan debt in bankruptcy is so difficult it’s rarely an option for distressed borrowers. But there are indications that bankruptcy courts are starting to play a bigger role in addressing what is widely considered a financial crisis and a drag on the U.S. economy, according to a BloombergBNA analysis. While not aiming to discharge debt, about two dozen bankruptcy jurisdictions allow debtors to participate in programs that cap repayments based on income. And attorneys are having anecdotal success in negotiating with the government to get more debtors into these repayment plans even when they are in bankruptcy. Edward C. Boltz, a consumer advocate and partner with Law Offices of John T. Orcutt, P.C., Durham, N.C., said that judges and trustees are becoming more engaged in the process and “bankruptcy must be part of the solution.” Judge John E. Waites of the U.S. Bankruptcy Court for the District of South Carolina told Bloomberg BNA July 11 that he sees it as his “mission” to educate consumer attorneys and trustees in cases before him that involve student debt. He likens the problem to the subprime mortgage crisis at the center of the 2008-09 financial meltdown and believes government will wind up having to “fix it.” Read more. 

Now available in the ABI Bookstore: Pick up your copy of the updated and revised Graduating with Debt: Student Loans under the Bankruptcy Code, Second Edition! 

Study after study shows that college students are terrible at keeping track of how much debt they are racking up in school, so states are working to make the cost of higher education crystal clear — and there are signs the moves are slowing runaway borrowing, the Wall Street Journal reported today. This month, Florida joined Indiana and Nebraska in requiring that colleges and universities provide detailed information about student debt and projected loan payments. Under a law that went into effect July 1, Florida’s institutions of higher education will now have to provide students a yearly report detailing how much they’ve borrowed so far, their expected loan total and estimated monthly payment. Federal Reserve data show that Americans had almost $1.44 trillion in student loans outstanding at the end of the first quarter this year, up by nearly $100 million in the past year. Other initiatives to better inform students about the financial implications of borrowing to attend college have shown early promise. Indiana University in 2012 began sending students annual letters estimating their total loan debt and future monthly payments, leading to a 23 percent drop in federal borrowing by students between the 2011-12 and 2015-16 academic years. A federal reserve study in 2015 found similar results at Montana State University.

Consumer credit expanded in May at the fastest rate in seven months, in what could be a sign that strong levels of confidence will lead to growth in consumption, MarketWatch.com reported yesterday. U.S. consumer credit rose at a seasonally adjusted annual rate of 5.8 percent, for growth of $18.4 billion, in May, the Federal Reserve said yesterday. Revolving credit like credit cards jumped 8.7 percent. Nonrevolving credit, typically auto and student loans, increased 4.7 percent. The monthly growth of consumer credit often seesaws, but the first quarter’s 4.8 percent growth was the slowest quarterly expansion in more than six years.