Student Loan Creditor Must Halt Collections, According to Settlement

Some people who are getting hounded by collection agencies for past-due
student loans may be getting a break soon. Photo: Shutterstock

At last, some good news for student loan holders—particularly those who are being harassed by collection agencies.

National Collegiate Student Loan Trusts (National Collegiate) must refund millions of dollars to borrowers and put a stop to its collections activities. According to the New York Times, National Collegiate holds $12 billion in student loans that were originally made by banks such as JPMorgan Chase and Bank of America, many of which were in default.

In the September 18 settlement with the Consumer Financial Protection Bureau (CFPB), National Collegiate agreed to pay nearly $19 million in penalties and borrower refunds. In addition, the trusts could find themselves responsible for millions in additional payments.

Debt collector Transworld Systems Inc., which National Collegiate hired, will pay another $2.5 million.

Under the settlement, National Collegiate must prove they can document that they own each loan and that it’s not too old to collect. Until that audit is complete, investors who own the bonds that contain those loans won’t get any cash from borrowers, even the ones who are making payments. The money will go into an escrow account instead.

According to the CFPB, the loans they examined—and the lawsuits made against the borrowers—had many, many irregularities. Some suits were filed long past the statute of limitations. Others didn’t have the paperwork to establish that the listed creditor had the right to collect, and still others contained misleading statements.

It’s still up to a judge to approve the settlement. But if it is approved, borrowers who had dealt with wage garnishments and levies against their bank accounts due to the status of their loans will get a break, albeit temporary. If the audit finds the loans can’t be collected, the loans would be forgiven, without the debtors having to pay income taxes.

“This is one of the most thorough judgments I have ever seen from a government agency. It’s fantastic,” Robyn Smith, an attorney for the National Consumer Law Center and Legal Aid Foundation of Los Angeles, told Bloomberg.

For its part, National Collegiate neither admitted nor denied the CFPB’s allegations.

Debt collection agency Transworld said in a statement that it was “disappointed” by the CFPB’s action. It “disagrees with the CFPB’s characterizations, and with many of the alleged facts in the consent order. TSI decided to settle with the CFPB in order to avoid costly and potentially protracted litigation with our primary regulator, and so that we may continue to focus all of our efforts on serving the needs of our customers.”

“This is a great precedent, but unfortunately National Collegiate are not the only ones engaging in this behavior,” said Smith.