Navient, the Giant Federal Student Loan Contractor, Cancels 66,000 Loans and Settles with Students It Misguided

In a massive legal settlement last week, Navient, the huge federal student loan contractor, agreed to cancel 66,000 student loans and make modest restitution payments to thousands of borrowers who were poorly advised over many years by Navient’s loan counselors.

For the Washington Post, Danielle Douglas-Gabriel explains: “Navient, one of the nation’s largest student loan companies, has entered into a $1.85 billion settlement with a coalition of state attorneys general to resolve allegations that it steered borrowers into costly repayment plans and predatory loans.  The agreement Thursday puts to rest multiple state probes into the company’s loan servicing and lending practices dating back to when it was known as Sallie Mae.  The agreement spans 39 states and the District (of Columbia) and will deliver $1.7 billion in private student loan cancellation to 66,000 borrowers nationwide and another $95 million in payouts.”

In coverage last September, Douglas-Gabriel reported that Navient had transferred “the 5.6 million accounts it managed on behalf of the (U.S.) Education Department to Maximus, another loan servicer.” She explained further, “The deal… means the exit of one of the most widely recognized servicing companies from the federal student loan apparatus. It arrives as the federal agency overhauls the management of its $1.6 trillion student loan portfolio.”

However, the NY TimesStacy Cowley and Tara Siegel Bernard explain that when the company ceased being a contractor for the U.S. Department of Education, “The company retained a portfolio of private student loans worth billions of dollars, and it later resumed that line of business. Navient has issued $17 billion in new private loans since it split from Sallie Mae.”

Cowley and Siegel Bernard report that last week’s settlement covers only borrowers from the 39 states whose attorney generals filed the lawsuit along with Washington D.C.  According to Forbes, to qualify for relief, borrowers must reside on one of the following states: Arizona, California, Colorado, Connecticut, DC, Delaware, Florida, Georgia, Hawaii, Iowa, Illinois, Indiana, Kentucky, Louisiana, Massachusetts, Maryland, Maine, Minnesota, Missouri, North Carolina, Nebraska, New Jersey, New Mexico, Nevada, New York, Ohio, Oregon, Pennsylvania, Tennessee, Virginia, Washington, or Wisconsin.

One of the 39 state attorney’s general who had joined the lawsuit against Navient, Pennsylvania’s attorney general Josh Shapiro spoke about the settlement: “Navient repeatedly and deliberately put profits ahead of its borrowers—it engaged in deceptive and abusive practices, targeted students who it knew would struggle to pay loans back, and placed an unfair burden on people trying to improve their lives through education.”

What exactly did Navient employees do to mislead student borrowers? For Mother Jones, Emma Rindlisbacher explains: “The lawsuit accused Navient of misleading federal student loan borrowers about alternatives to what is known as forbearance. When student borrowers are unable to make payments on their loans, they are supposed to have multiple options, including switching to income-driven repayment plans, which set payments based on a borrower’s income and can be more affordable. Forbearance, by contrast, can be more expensive, because while borrowers are temporarily able to stop making payments, interest continues to accrue… Navient was also accused of improperly originating private loans to for-profit colleges with low graduation rates, resulting in borrowers being unable to pay off their debts.”

Navient’s predecessor company was the huge student loan contractor Sallie Mae from which Navient split off in 2014. In their new book, The Privatization of Everything, Donald Cohen and Allen Mikaelian provide some history—tracing Sallie Mae back to its founding in 1972: “(T)he Higher Education Act of 1965 opened financial doors to private interests due to an accounting gimmick. Direct loans from the government to students were expenditures; they counted as government spending. Loans made by private banks but guaranteed by the government didn’t appear at all, unless the borrower defaulted and the government had to pay the bank. For conservatives it was a way to impose a veneer of shrinking government… For banks it was an unbelievable risk-free opportunity… Their next big windfall came in 1972 with the creation of the student Loan Marketing Association—Sallie Mae—which took the burden off the banks even further by purchasing student loans from them. It was now possible for private banks to loan money, sell those loans to the quasi-governmental Sallie Mae, and then recycle that money to loan it out again… After George H.W. Bush signed a law banning the federal accounting quirks that brought in the banks, his administration made the obvious determination that direct loans from the government would be far cheaper.”  (The Privatization of Everything, pp. 182-183)

Then in 1996, Sallie Mae was “fully privatized… It could set up an internal collections shop and handle servicing.  It could charge fees. More consequential, it could now originate loans that were guaranteed by the government.  Most consequential of all, it could make its very own private loans with high interest rates, not backed by the government, and targeted at the same students who were taking out the government backed loans.” (The Privatization of Everything, p. 183)

Cohen and Mikaelian continue: “Finally, perhaps the most unsavory side of this sordid tale is the predatory symbiosis that grew between for-profit colleges and lenders like Sallie Mae. The for-profit colleges served low-income populations, and most of their revenue depended on the free flow of government-backed loans. However, laws were still in place that prohibited them from making more than 90 percent of their income from federal aid and loans. Many for-profits were in danger of crossing this line. Sallie Mae was their savior, because it could help guide students into non-guaranteed subprime loans and keep the for-profit schools under that 90 percent… The real tragedy behind all of these stories is that the victims were believers in hard work and education as a means to get ahead….” (The Privatization of Everything, p. 185)

The Washington Post‘s Douglas-Gabriel describes exactly who will find relief in the settlement reached last week: “The lion’s share of the settlement money will arrive in the form of debt cancellation for tens of thousands of people who borrowed money from Sallie Mae to primarily attend for-profit colleges, including ITT Technical Institute campuses and the chain of Art Institute schools.” Also, “About 350,000 federal student loan borrowers who were placed in certain types of long-term forbearances will receive payments of about $260.”  These are the students counseled by Navient employees into forbearance instead of more affordable alternative payment plans.

The NY Times‘ Cowley and Siegel Bernard show that Navient negotiated a settlement last week that will not punish the company itself as seriously as it might appear: “The loans that will be canceled… are past-due loans made in 2002 and after to borrowers at certain for-profit schools or through Navient initiatives, including its ‘Opportunity’ and ‘Recourse’ programs. The eligible schools include major for-profit chains like ITT and Corinthian Colleges, both of which have collapsed, as well as Bridgepoint Education, DeVry University and Education Management Corporation… While the eliminated loans will be a great relief to the borrowers tho took them out, most of the debts Navient is agreeing to wipe out are long-overdue loans for which it was already unlikely to be repaid. Navient valued the $1.7 billion it agreed to forgive at just $50 million—the total it expected it would ever be able to recoup….”

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