Judge Rejects Major Student Loan Settlement


A federal judge just rejected a major student loan settlement.

Here’s what you need to know.

Student Loans

A federal judge in Delaware rejected a proposed settlement that could have helped hundreds of thousands of student loan borrowers receive financial relief. The settlement relates to a 2017 lawsuit regarding alleged illegal student loan debt collection that potentially could have granted $5 billion of student loan forgiveness. Why was the settlement rejected? An apparent technicality: the lawyers involved apparently did not have the authority to enter into a settlement agreement.

The Lawsuit: What happened?

The National Collegiate Student Loan Trusts holds 800,000 private student loans through 15 different trusts, which collectively own approximately $12 billion of student loan debt. These student loans were originally issued by banks, and then subsequently sold through securitization to investors, including the National Collegiate Student Loan Trusts. Approximately 160,000 of these private student loans were in default. National Collegiate filed tens of thousands of lawsuits against borrowers mostly in state and local courts in order to collect on the unpaid student loan debt. Here’s the kicker: in many cases, the ownership records may have been lost. If National College could not prove proper chain of title and ownership of the student loans, it becomes more difficult to collect on unpaid student loan debt.The paperwork dilemma pits student loan borrowers who have struggled to make student loan payments against creditors seeking to collect on unpaid student loan debt.

The Proposed Agreement

The Consumer Financial Protection Bureau (CFPB) proposed a settlement (that the judge rejected) that required National Collegiate and its student loan debt collector, Transworld Systems, to do the following.

  • Conduct an independent audit of the 800,000 student loans in its trusts;
  • Stop student loan debt collection if National Collegiate cannot prove they own the student loans they are collecting;
  • Pay at least $3.5 million in restitution;
  • Stop filing collections lawsuits on student loan debt after expiration of the statute of limitations;
  • Stop reporting negative credit information on borrowers National Collegiate is suing improperly;
  • Stop filing false or improperly notarized legal documents;
  • Pay $7.8 million in disgorgement to the U.S. Treasury;
  • Pay a $7.8 million civil money penalty; and
  • Pay a $2.5 million civil money penalty.

Another Lawsuit: Paychecks seized to pay student debt

This is not the only lawsuit regarding alleged illegal collection of student loan debt. Under the CARES Act, the $2.2 trillion stimulus package, federal student loan debt collection was supposed to halt effective March 13, 2020. A federal class action lawsuit filed in April alleged that despite that prohibition, U.S. Secretary of Education Betsy DeVos is illegally seizing paychecks from federal student loan borrowers during the Coronavirus pandemic. The Education Department says it notified employers to comply with the CARES Act and to stop garnishing their employees’ wages as of March 13. Apparently, not all employers are in compliance—since 54,000 student loan borrowers allegedly had their paychecks improperly garnished to pay past due federal student loan debt.

Update: According to the U.S. Department of Education, for the week ending June 4, 2020, fewer than 2,600 employers were still garnishing the wages of approximately 6,000 borrowers. This represents an overall decrease of 98.5% of affected borrowers since March 13, 2020. The Education Department also says it has reduced the processing time for refunds from several weeks to approximately four to five business days from the date Treasury received the wage garnishment. According to the Education Department, the Education Department and Treasury Department have refunded all garnished wages for borrowers with a valid address on file and is actively trying to reach the remaining borrowers with invalid addresses to get them to update their contact information.

By Zack Friedman