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Lost or messy paperwork means some borrowers see private student loans wiped away

Students protest the rising costs of college loans in Los Angeles in 2012.
Students protest the rising costs of college loans in Los Angeles in 2012.
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For a lot of people, taking out loans to go to college is a way to get ahead. It's a chance to improve their career prospects and reach financial stability.

But the plan doesn't always work out that way. Sometimes a life crisis intervenes, or the job they get out of college doesn't pay enough. They fall behind on student loan payments. Eventually, the company that owns the debt takes them to court.

An investigation by The New York Times found that for tens of thousands of borrowers, this is the point when things could take an unusual turn. 

In many private loan collections cases, the paperwork trail--the legal evidence of a borrower's debt--was lost or inaccurate. This has prompted judges in several states to entirely wipe away a borrower's debt.

Stacy Cowley is a consumer finance reporter with The New York Times. She wrote about this issue and joined A Martinez to discuss what's going on.

Q: This all started with people falling behind on their student loans...and creditors coming after them. What happened when these collections cases went to court?

A number of them have been going to court in recent years, and a pattern started to emerge. When the trusts were asked to present the chain of title paperwork showing that they owned the loans, quite often there were weaknesses in it. 

It's really hard to spot. This paperwork's really complicated. But some lawyers and some judges started to notice that it wasn't what it should have been. And eventually the owner of the trust did an audit and found that quite a lot of paperwork had been lost. 

. . . Some critical paperwork in the chain, showing who owned the debt at various moments in time, is missing. . . It's been challenging for the lawyers to prove over the years. The trusts do often submit some paperwork, but there are holes. And as lawyers have advanced more and more of these cases, they've become savvier about what to look for and how to point out to judges that certain papers are missing.

Please click on the blue media player above to listen to the full interview.