On April 9, 2017, the New York Times reported news that rocked the student loan servicing market. State attorneys in Washington and Illinois joined the Consumer Financial Protection Bureau in filing lawsuits against Navient, the giant student loan servicer hived off from Sallie Mae in 2014. Navient manages student loans for more than 12 million customers, worth about $300 billion.
Navient, which denied doing anything wrong, stands accused of cheating and misleading borrowers in seven different ways:
- Improperly steered borrowers into forbearance: Many federal student loan borrowers who have trouble making timely payments are eligible for one of several income-based repayment programs. These programs limit how much a borrower must repay each month, sometimes quashing all payments when a borrower has little or no income. Forbearance is an alternative solution, in which payments are suspended for up to 12 months. Interest accrues during forbearance, which explains why it is intended for only limited use. Navient pushed at least 1.5 million borrowers into two or more consecutive periods of forbearance, and 520,000 were guided into four forbearances. About $4 billion in unnecessary interest accrued during these forbearances, money that would have remained with borrowers if they had instead enrolled in an income-based repayment program. Navient claims it was not their responsibility to act in the interest of the consumer.
- Botching renewal deadlines: Despite Navient’s attempts to push borrowers into forbearance, many did find their way into income-based repayment plans. One feature of these plans requires borrowers to renew their applications every 12 months, lest they be dropped from the program and subject to lost interest subsidies and higher monthly payments. The lawsuits charged Navient with failure to warn its customers to renew their applications. About 60 percent of Navient customers on these programs failed to renew during the period of July 2011 through March 2015. The vague notices sent out by Navient omitted the actual renewal date, and the email subject line did not mention renewals. The renewal rate doubled beginning in March 2015 when Navient changed the email subject line to warn of upcoming higher payments.
- Processing payments incorrectly: The lawsuits accuse Navient of screwing up payment processing, especially when dealing with checks. The main problem arises when a borrower has several student loans handled by a single servicer. Frequently, these borrowers send in lump-sum payments to cover multiple loan accounts, with instructions to apply most of the money to a specific account – usually, the account with the highest interest rate. Instead, Navient would divide the lump sum evenly among all account, increasing the interest charged to the borrower. Co-signer payments were similarly disregarded. Navient did not have the systems and equipment necessary to detect written instructions, and admitted in one previous lawsuit that errors repeatedly occurred month after month.
- Misleading co-signers: Co-signers often make the difference as to whether a borrower will be given a private student loan. That’s nice for borrowers, but it leaves co-signers responsible for loan repayments if the borrower punks out. The rules call for co-signers to be released from their loans after a set number of timely, consecutive payments (usually 12) have been made. However, the lawsuit alleges that Navient made it difficult for co-signers to obtain their releases. The scam worked this way: Suppose a borrower (who enlisted a co-signer) makes a double-sized payment one month. The borrower can opt to apply the overpayment to the principle, or to skip the next month’s payment – the next month’s bill will be $0. If the borrower skips the second month’s payment, the string of consecutive payments is broken and the month count is reset to zero, delaying co-signers’ right of release. By not clarifying the implications of skipping payments, Navient caused deceitful denial of co-signer release requests.
- Lying about rehabilitation: When times get tough, some student loan borrowers default – that is, fall 12 or more months behind on their payments. Many defaulters are honest and upstanding, and when conditions approve, they want to do the right thing with regard to their federal direct or family education student loans. This process is called rehabilitation, in which the borrower:
a. Commits to make nine reasonable and timely monthly repayments, and
b. Makes such payments over a period of 10 consecutive months
“Reasonable” repayments are usually 15 percent of the borrower’s annual discretionary income, divided by 12, although repayments as low as $5 can be arranged. Once you meet your rehabilitation commitment, your loan is no longer considered to be in default. The lawsuit charges that Navient’s subsidiary, Pioneer Credit Recovery, over promised the positive effects of rehabilitation upon the borrower’s credit reports, and overestimated the amount of the loan’s collection fees that would be forgiven.
- Misreporting discharges: Totally and permanently disabled student loan borrowers can have their student loans forgiven, or “discharged.” Navient is accused of using the wrong code when reporting discharged loans to credit bureaus, marking them as defaulted loans instead. This sent the credit scores of disabled borrowers into freefall, preventing them from obtaining mortgages, credit cards and other types of credit. Adding insult to injury, some of disabled affected by this problem were military veterans injured while serving.
- Preying on vulnerable students: The two states participating in the lawsuits against Navient allege the predecessor company, Sallie Mae, made predatory loans to subprime borrowers who were likely to default. Sallie Mae did this between the years 2000 and 2009 in order to secure a position on the preferred lender lists of various schools, thus increasing its share of federal loans. Many of the schools involved were for-profit universities with low graduation rates and high default rates. In other words, these loans were a loss leader for Sallie Mae that ensnared borrowers with billions in debt.
An interesting footnote: It was reported by the NY Times on June 16 that several consumer groups were asking the federal government to take action against Navient for illegally harassing and abusing borrowers with never-ending automated telephone calls, despite instructions to stop. Navient denies the allegation.