Roughly 66,000 borrowers will see their private student loans cancelled — totaling more than $1.7 billion in relief — thanks to a deal between 39 state attorneys general and student loan giant Navient
NAVI,
In addition, the agreement will provide about $95 million in payments to 350,000 federal student loan borrowers, who Navient allegedly steered towards unnecessarily costly repayment programs.
The settlement wraps up years of legal battles between state consumer attorneys general and Navient over the company’s treatment of student loan borrowers. The suits filed in various states detailed allegations about the company’s behavior in many aspects of the student loan business, including private student loan origination and servicing of federal student loans — a business the company exited last year. The settlement does not resolve a lawsuit filed by the Consumer Financial Protection Bureau against Navient in 2017.
“The bottom line is this, Navient knew that people relied on their loans to make a better life for themselves and for their children and instead of helping them they ran a multi-billion dollar scam,” Josh Shapiro, Pennsylvania’s attorney general, told reporters.
In a statement, Mark Heleen, Navient’s chief legal officer, called the claims addressed by the deal “unfounded,” adding that the settlement allows the company to “avoid the additional burden, expense, time and distraction to prevail in court.”
“Navient is and has been continually focused on helping student loan borrowers understand and select the right payment options to fit their needs,” Heleen added.
Navient denied wrongdoing as part of the deal. Still, the attorneys general asserted that they would have prevailed in court if the suits had continued.
“It doesn’t matter what they admit or don’t admit,” said Shapiro, who is also running for governor of Pennsylvania, “actions speak louder than words.” In Pennsylvania, a judge denied Navient’s motion to dismiss the case in 2020. In Washington, a court found last year that Navient had violated consumer protection law. The ruling surrounded one of the allegations that were part of the suit filed by Washington Attorney General Bob Ferguson’s office in 2017. That suit was settled as part of the deal announced Thursday.
“I have no doubt what the outcome would have been had we gone through the time and expense of litigation, but it was important to balance that with immediate relief for borrowers,” Ferguson told reporters. “Whether they want to take responsibility for what they did or not that’s up to them, but I do know a judge out here ruled they violated the law.”
The deal settles allegations over private loans ‘doomed to fail’
The bulk of the relief — the $1.7 billion in cancelled private debt — relates to allegations brought by multiple state attorneys surrounding the behavior of Navient’s corporate predecessor, Sallie Mae, in originating certain private student loans after 2002.
A suit filed by Shapiro in 2017, which is one of the suits the settlement addresses, alleged that during the early and mid-2000s, Sallie Mae, used loans to borrowers, who they knew had a high probability of defaulting, as a way to generate more federal student loan business. At the time, colleges could provide students and families with a “preferred list” of lenders. For lenders, a high spot on a college’s preferred lender list meant an almost-guaranteed stream of business.
In order to appeal to schools, Navient’s corporate predecessor allegedly offered them packages of loans that included prime private student loans, subprime private student loans and Family Federal Education Loans (or FEELP loans) — federal student loans that lenders originated but were backed by the federal government.
The packages were attractive to schools because they offered a way for borrowers who normally wouldn’t qualify for a private loan to fill a gap between what federal loans would cover and the cost of tuition, allowing them to enroll. For Navient, the suit claimed, the subprime private loans — with interest rates as high as 15.75% — were a “loss leader” that got them access to the lucrative FFELP loan volume.
Between 2000 and 2006, the company saw major growth in its origination business, in particular to students who attended colleges, including for-profit schools, with graduate rates of less than 50%, Shapiro’s office alleged. Between 2000 and 2007, 68% to 87% of these loans defaulted, the suit claimed.
“These loans were doomed to fail from the start and Navient knew it,” Maura Healey, the Massachusetts attorney general, told reporters.
The deal addresses conduct borrower advocates and regulators have decried for years
The settlement also addresses conduct in federal student loan servicing that borrower advocates and regulators have decried for years. Federal student loan borrowers have access to repayment plans that allow them to pay off their debt as a percentage of income, but advocates and borrowers have alleged that servicers steer distressed borrowers towards forbearance instead — a status where payments are paused, but interest accrues — in order to save time and money.
Forbearance, intended as a short-term fix to financial distress, can be costly for borrowers because of the excess interest, which capitalizes when the borrower exits forbearance. For example, in the 2017 Pennsylvania suit, Shapiro’s office alleged that one Navient borrower who was in and out of forbearance for 11 years saw $27,000 in interest added to his loan balance as a result.
When borrowers who were in financial distress “would reach out to Navient looking for assistance, what Navient did was deceive them,” Ferguson said. Because of poor advice, these borrowers “paid interest on that interest and got deeper into debt,” he said. They also missed out on qualifying payments towards having their loans discharged under certain programs, like Public Service Loan Forgiveness.
The settlement will provide some relief to borrowers who were allegedly steered towards forbearance when they were eligible for a less-costly repayment program. But it’s unclear whether the Department of Education, which owns the loans at issue in this part of the settlement, will take separate steps to address any of the allegations. The agency didn’t immediately provide a comment.
The pressure is on Secretary of Education Miguel Cardona to address this issue, said Mike Pierce, the executive director of the Student Borrower Protection Center, a borrower advocacy group. Now that a bipartisan coalition of 39 state attorneys general said that “forbearance-steering is a huge problem and Navient broke the law,” Pierce said, it’s up to the agency to “figure out what to do with this now.”
“This is a huge problem and it needs a huge solution and only the Department of Education can deliver that,” he said.
Rob Bonta, the attorney general of California, said that though the settlement is an important step, “We also look to the Department of Education to step in.” He praised the agency’s work addressing other challenges borrowers faced in the student loan servicing system, including by expanding a loan forgiveness program for public servants, adding that he hopes that “here too we can get broader relief for borrowers.”
Eligible borrowers won’t have to take any steps to receive relief. In the case of the private debt cancellation, Navient will be sending borrowers a notice along with refunds of any payments they made on the loans by June 30 of this year. Eligible federal student loan borrowers will receive a postcard in the mail regarding the settlement. They don’t need to take any action to receive the relief, but should make sure they have an account on studentaid.gov and that their contact information is accurate.