Borrowers have defaulted on billions of dollars in private student loan debt. Seeking payment on those soured loans, creditors file tens of thousands of lawsuits each year.
But those lawsuits often contain legal and factual errors, according to borrowers’ lawyers — and a growing number of judges have upheld their arguments and rejected creditors’ claims.
Below are five defenses that have been successfully used to halt student loan collection cases.
Many private student loans are transferred by their original lender to investors through a process called securitization, in which thousands of loans are pooled together and sold as a package.
But proving that the chain of title remained intact through every ownership transfer can be a challenge for debt holders. In one frequently cited ruling, Lovett v. National Collegiate Student Loan Trust 2004-1, a Florida appeals court held that the creditor, a securitized investment trust, had not submitted sufficient evidence to prove that it owned the note on a loan originated by Bank One in Chicago.
The court overturned a summary judgment and returned the case to a lower court. At that point, the creditor withdrew the case, according to N. James Turner, the defendant’s lawyer.
Many states have precise rules about what kinds of business records, such as promissory notes and payment ledgers, can be relied on in court. And there are rules about who is qualified to vouch for the authenticity and accuracy of such records. Many jurisdictions require direct or firsthand knowledge of how the records were created.
In one case in California, National Collegiate Student Loan Trusts v. Nohemi Macias, an appeals court ruled that an employee of a debt collection firm was not qualified to verify the creditor’s loan records and, in her testimony, “effectively conceded that she was unable to do so.”
Without those loan records, a three-judge panel ruled, “plaintiffs would have been left with nothing to support their case.”
Federal student loans are generally exempt from time limits on when they can be collected, but private loans are not. After years without payment — the exact length of time varies by state — collectors may lose their right to sue.
In a case in Arizona, National Collegiate Student Loan Trust 2004-2 v. Gallagher, an appeals court struck down a creditor’s 2014 lawsuit over a student loan on which the last payment was made seven years earlier. Because Arizona’s statute of limitations for breaching a written contract is six years, the creditor had waited too long to sue, the court ruled.
Some states require “foreign corporations” — those based in other states — to register to operate in their area. Failing to do so can prevent creditors from using the local court system.
In New York, a judge dismissed four lawsuits brought by securitized investment trusts owned by Navient because the trusts were not registered to do business in the state. “Plaintiff lacks capacity to sue,” he wrote in one of the rulings, SLM Education Finance Corporation v. Gray.
Steven J. Richardson, a lawyer who represents borrowers in New Jersey, said he has relied on a similar ruling in his state’s courts, National Collegiate Student Loan Trust 2006-2 v. Cowles to fight collection lawsuits. He has a form letter he sends out when a client is sued by a creditor that does not comply with the state’s Corporation Business Activities Reporting Act. Every case he has answered with one of those letters has been withdrawn by the creditor, he said.
When courts ask creditors to provide additional documents, or produce witnesses to testify about their claims, the creditors often simply withdraw their lawsuits, according to borrowers’ lawyers.
“It’s a numbers game,” said Jay S. Fleischman, a lawyer for borrowers in student loan collection cases. “If they can’t win or settle these cases quickly, they often dismiss them. I have never had a student loan collection case go to trial, ever.”
In one New Hampshire case, for example, a judge criticized “a discrepancy” in the creditor’s records and asked for clearer proof that the creditor owned the student loan. The creditor never responded, and the case was dismissed.
A Florida law allows courts to dismiss a case for “lack of prosecution” if more than a year goes by without substantive action by the plaintiff to move it forward. A review of state court dockets showed that hundreds of student loan collection cases have been dismissed on that ground.