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….”

Student Loan Debacle: What Will Be Response from DeVos Department of Education?

The Obama administration had planned to revamp completely the system by which the U.S. Department of Education administers and collects $1.3 trillion in college loans. The service has been terrible and confusing, say consumer advocates, and some of the contractors have been overcharging borrowers with big fees.

Last week the NY Times editorialized: “Education Secretary Betsy DeVos is inexplicably backing away from rules that are meant to prevent federal student loan borrowers from being fleeced by companies the government pays to collect the loans and to guide people through the repayment process. On Tuesday, she withdrew a sound Obama administration policy that required the Education Department to take into account the past conduct of loan servicing companies before awarding them lucrative contracts—and to include consumer protections in those contracts as well.”  What this all means is that the federal government, as the enormous provider of loans to help students pay for college, contracts out the servicing of those loans to for-profit companies, which can charge fees for their services. The Obama administration had planned to restructure this process, but the Trump administration has now abandoned the Obama administration’s plan.

The NY Times has been investigating, and here is one of its reports on DeVos’s recent action: “With the stroke of a pen… Betsy DeVos, President Trump’s new education secretary, thrust the future of the government’s system for managing federal student loans into confusion. It was a high-stakes move: Her department administers $1.3 trillion in loans on behalf of nearly 43 million student borrowers.  At issue is which companies will handle the bulk of those loans in the future, and how they will do it. Under the Obama administration, the Education Department was on the verge of selecting a single vendor to build a new system for servicing its student loans, in what was expected to be one of the largest federal contracts outside of the military.”

The NY Times reporters, Stacy Cowley and Jessica Silver-Greenberg, provide the background for what is the complicated and poorly understood operation of federal college loans.  Nine different companies have been billing and collecting payments on student loans, but borrowers have complained about poor service: “The Obama administration sought to replace this labyrinthine system with a single entry point—a sea change in how student loan servicing would work. Instead of dealing directly with private vendors, all federal borrowers would gain access to their accounts through an Education Department portal, with standardized forms and processes.”

The Obama administration’s plan was to choose a single contractor, and the Department had been accepting bids. Three finalist companies had emerged from the bidding competition, Navient, the Pennsylvania Higher Education Assistance Agency, and a joint proposal from Nelnet and Great Lakes.  A primary condition for the selection of the provider was supposed to be the company’s past performance.

This is an enormously complicated story, and it is unclear to me whether we are headed in a worse or better direction. We must watch closely to see whether the DeVos education department improves oversight. It wasn’t entirely clear, however, that the Obama administration’s plan would have eliminated serious abuses by loan collectors. One of its finalists seems questionable.

It is likely that DeVos and her staff are caving in to pressure from the loan companies’ lobbyists.  Bloomberg reporter Shahien Nasiripour reports: “DeVos formally withdrew the Obama memos. The previous administration’s approach, DeVos said, was inconsistent and full of shortcomings.  She didn’t detail how the moves fell short…. DeVos’s move comes a week after one of the student loan industry’s main lobbies asked for Congress’s  help in delaying or substantially changing the Education Department’s loan servicing plans. In a pair of April 4 letters to leaders of the House and Senate appropriations committees, the National Council of Higher Education Resources said there were too many unanswered questions….”

But there is also a big problem with one of the companies the Obama administration had chosen as a finalist for the contract as sole loan collector.  Navient has a long history as the collector of sub-prime, disreputable loans made by the company which spun it off in 2014. An earlier investigation by the same two NY Times reporters—Cowley and Silver-Greenberg— surfaced serious problems: “In recent months the student loan giant Navient, which was spun off from Sallie Mae in 2014 and retained nearly all of the company’s loan portfolio, has come under fire for aggressive and sloppy loan collection practices, which led to a set of government lawsuits filed in January. But those accusations have overshadowed broader claims, detailed in two state lawsuits filed by the attorneys general in Illinois and Washington, that Sallie Mae engaged in predatory lending, extending billions of dollars in private loans to students… (loans) that should never have been made in the first place.”

Investopedia explains the history of Sallie Mae—once involved with government student loans, but today a private for-profit: “Sallie Mae is a private lender, so its direct loans are not federal loans. Basically federal student loans consist of money provided by the U.S. government, while private student loans come from entities such as banks and other financial institutions. There are also instances in which private entities work as loan servicers for certain federal loans on behalf of the government… Up until October 13, 2014, Sallie Mae, while generally known as a private lender, worked as a loan servicer for two federal student loans: the William D. Ford Federal Direct Loan Program and the Federal Family Education Loan (FFEL) Program. On that date, Sallie Mae split into two separate companies, and the portion of the company that was in charge of federal loan servicing became its own company, known as Navient.  From that point forward, Sallie Mae has only originated private student loans.” In 2014, when Sallie Mae spun off Navient—which is also a publicly traded, for-profit—Navient became the largest servicer of federal student loans and one of the nine loan collectors with a contract from the U.S. Department of Education.

Cowley and Silver-Greenberg raise serious concerns about subprime student loans originated by Sallie Mae, loans originated while Sallie Mae was fully aware that students would likely eventually default because the education programs for which students borrowed were not really preparing them for jobs: “New details unsealed last month in the state lawsuits against Navient shed light on how Sallie Mae used private subprime loans—some of which it expected to default at rates as high as 92 percent—as a tool to build its business relationship with colleges and universities across the country.  From the outset, the lender knew that many borrowers would be unable to repay, government lawyers say, but it still made the loans, ensnaring students in debt traps that have dogged them for more than a decade. While these risky loans were a bad deal for students, they were a boon for Sallie Mae. The private loans were—as Sallie Mae itself put it—-a ‘baited hook’ that the lender used to reel in more federally guaranteed loans, according to an internal strategy memo cited in the Illinois lawsuit.”  Remember that before 2014, Sallie Mae itself was a primary servicer of student loans.

Illinois and Washington are now suing Navient—still collecting as Fannie Mae’s spinoff—in an effort to get shady, subprime Sallie Mae loans forgiven: “The attorneys general in Illinois and Washington—backed by a coalition of those in 27 other states, who participated in a three-year investigation of student lending abuses—want those private loans forgiven.  In a pair of cases that could affect hundreds of thousands of borrowers, they have sued Navient. The lawsuits cover private subprime loans made from 2000 to 2009.”  The reporters add: “Navient, which is based in Wilmington, Del., has denied any wrongdoing and is fighting the lawsuits. It does not originate any loans itself, but when it split off from Sallie Mae, it kept most of Sallie Mae’s existing loans. It collects payments from some 12 million people—about one in four student loan borrowers.”

In a 2008 after a regulatory crackdown, according to the NY Times reporters,  Sallie Mae discontinued originating subprime student loans, but, Navient, the company it spun off in 2014, is still continuing to collect  money owed from decades old borrowing by students.  The reporters compare the student loan debacle to the subprime mortgage crisis: “These cases have parallels to the mortgage crisis that helped drive the American economy into recession, both in scope—borrowers in the United states owe $1.4 trillion on student loans—and in the details of the misdeeds claimed.  Working together, the lenders and (mostly for-profit) colleges were preying on a vital part of the American dream….”

Clearly the Obama administration’s effort to redesign loan collection and at the same time increase oversight was a very good thing. We should give the Obama U.S. Department of Education credit for pressuring Sallie Mae to spin off its division that processed government loans from Sallie Mae’s own private, for-profit origination of too-often predatory student loans. At the same time we should suspect that DeVos and her department are stepping back for all the wrong reasons from further regulating the private contractors who collect on student loans. It does seem, however, that Navient, one of the three finalists selected by the Obama education department, would have been the wrong choice to be the federal government’s sole federal student loan collector.