How, exactly, does the paperwork connected to roughly $5 billion worth of loans just disappear?
New York attorney general Eric T. Schneiderman is one of the people who'd like to find out. In response to a New York Times story published on Monday, which detailed a series of lawsuits brought by one of the largest owners of private student loan debt in the U.S., Schneiderman's office has launched an investigation into "a broad range of potential abuses and violations of New York law."
The company in question, National Collegiate Student Loan Trusts, may have brought lawsuits against borrowers in cases where the company is unable to prove ownership of the loans. The loans currently being disputed total more than $5 billion.
National Collegiate has a reputation for "aggressively suing students, " according to The Student Loan Law Group, a firm that specializes in litigation related to student loans. In 2014, borrowers in California brought a class action lawsuit against the company alleging deceptive practices (the case was later settled.)
"I won't allow a generation of New Yorkers to get victimized by the very system that was created to help them get ahead," Schneiderman told CNBC Make It via an emailed statement. "These reports are deeply concerning, but are unfortunately consistent with the increasingly cynical and freewheeling culture we've seen take hold of the student loan industry."
National Collegiate has purchased over 800,000 private student loans that borrowers took out decades ago through other lenders. The company repackages these risky loans and sells their securities to investors, similar to how subprime mortgages were repackaged and sold prior to the housing crisis.
According to court filings published in The Times, paperwork proving National Collegiate's ownership of the debt "appears to have been lost" during the handover. Joel Leiderman of law firm Forster and Garbus, who represented National Collegiate in litigation against borrower Samantha Watson, did not respond to requests for comment.
Private student loans have high interest rates (some as high as 13.74 percent) and are frequently used to finance expensive degrees at for-profit colleges. As a result, borrowers often default. National Collegiate and loan providers like it will then sue borrowers who fall behind on their payments. Usually, borrowers settle or ignore the summons altogether, according to the Times.
But recently, borrowers have challenged National Collegiate, and judges in many of these cases have ruled that the company's mass-produced documentation does not conclusively prove ownership.
Schneiderman's office emphasizes that it's too soon to speculate on a potential outcome, but the attorney general appears optimistic that borrowers' interests will be fairly represented.
"We will conduct a full investigation," he said in a statement, "and will hold the perpetrators of any fraud against our students accountable."
To be smart about financing your degree, avoid taking out private loans or attending for-profit colleges. Instead, consider taking out federal student loans and attending a non-profit college, which can offer a quality education at an affordable price. The Institute for College Access and Success reports that 47 percent of private loan borrowers could have used more affordable federal loans.
Like this story? Like CNBC Make It on Facebook