Navient cancels $1.7 billion in private student loans in settlement with 39 attorneys general

About 66,000 borrowers will have their private student loans forgiven – totaling more than $1.7 billion in relief – thanks to an agreement between 39 state attorneys general and student loan giant Navient NAVI,
-1.14%.

In addition, the agreement will provide approximately $95 million in payments to 350,000 federal student borrowers, whom Navient would have directed to unnecessarily expensive repayment programs.

The settlement concludes years of legal battles between state attorneys general and Navient over the company’s treatment of student loan borrowers. Lawsuits filed in various states detailed allegations about the company’s behavior in many aspects of the student loan industry, including the provision of private student loans and the servicing of federal student loans – a business the company has left 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 people were counting on their loans to improve their lives and the lives of their children, and instead of helping them, they ran a multi-billion dollar scam,” said Josh Shapiro , Attorney General of Pennsylvania. told reporters.

In a statement, Mark Heleen, Navient’s chief legal officer, called the claims covered by the settlement “unsubstantiated”, adding that the settlement allows the company “to avoid the burden, expense, time and additional distractions prevailing in the courts”.

“Navient is and has always been focused on helping student borrowers understand and select the right payment options to meet their needs,” added Heleen.

Navient has denied any wrongdoing in connection with the deal. Yet attorneys general have claimed they would have prevailed in court had the prosecution continued.

“No matter what they admit or not,” said Shapiro, who is also a candidate 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 violated consumer protection law. The ruling surrounded one of the allegations that were part of the lawsuit filed by Washington Attorney General Bob Ferguson’s office in 2017. That lawsuit was settled as part of the settlement 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 is up to them, but I know a judge here ruled they broke the law.”

Deal settles allegations of ‘doomed’ private loans

The bulk of the relief — the $1.7 billion in private debt forgiven — relates to allegations made by multiple state attorneys regarding the behavior of Navient’s predecessor, Sallie Mae, in issuing certain private student loans. after 2002.

A lawsuit filed by Shapiro in 2017, which is one of the lawsuits addressed by the settlement, alleged that in the early and mid-2000s, Sallie Mae used loans to borrowers, who they knew were had a high probability of default, 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 near-guaranteed deal flow.

In order to appeal to schools, Navient’s predecessor reportedly offered them loan packages that included private prime student loans, subprime private student loans, and federal family education loans (or FEELP loans) – student loans that lenders created but were backed by the federal government. government.

The packages were attractive to schools because they offered borrowers who would not normally qualify for a private loan a way to bridge a gap between what federal loans would cover and tuition, allowing them to enroll. For Navient, according to the lawsuit, private subprime loans – with interest rates as high as 15.75% – were a “loss leader” that allowed them to access the lucrative volume of FFELP loans.

Between 2000 and 2006, the company experienced significant growth in its origination business, particularly for students who attended colleges, including for-profit schools, with graduation rates below 50%, according to the office. by Shapiro. Between 2000 and 2007, 68% to 87% of those loans defaulted, according to the lawsuit.

“These loans were doomed from the start and Navient knew it,” Massachusetts Attorney General Maura Healey told reporters.

The agreement addresses conduct that borrower advocates and regulators have been complaining about for years

The settlement also addresses conduct in the federal student loans service that borrower advocates and regulators have been decrying for years. Federal student loan borrowers have access to repayment plans that allow them to pay off their debt as a percentage of their income, but advocates and borrowers have argued the services instead steer troubled borrowers into forbearance — a status where payments are suspended, but interest accrues – in order to save time and money.

Forbearance, intended as a short-term solution to financial hardship, can be costly for borrowers due to excess interest, which accrues when the borrower exits forbearance. For example, in the 2017 lawsuit in Pennsylvania, Shapiro’s office alleged that a Navient borrower who was in and out of forbearance for 11 years had $27,000 in interest added to his loan balance as a result. .

When financially troubled borrowers “contacted Navient for help, what Navient did was deceive them,” Ferguson said. Due to bad advice, these borrowers “paid interest on that interest and got into more debt,” he said. They also missed eligible payments to get their loans canceled under certain programs, such as the civil service loan forgiveness.

The settlement will provide some relief to borrowers who would have been pressured into forbearance when they were eligible for a less expensive repayment program. But it’s unclear whether the Department of Education, which holds the loans at issue in this part of the settlement, will take separate action to address any of the allegations.

Pressure is on Education Secretary Miguel Cardona to address the issue, said Mike Pierce, executive director of the Student Borrower Protection Center, a borrower advocacy group. Now that a bipartisan coalition of 39 state attorneys general has said “forbearance is a huge problem and Navient broke the law,” Pierce said, it’s up to the agency to “figure out what to do with it.” now”.

“It’s a huge problem and it needs a huge solution and only the Ministry of Education can achieve that,” he said.

California Attorney General Rob Bonta said that while the settlement is an important step, “we are also counting on the Department of Education to step in.” He praised the agency’s work to address other challenges borrowers face in the student loan management system, including expanding a loan forgiveness program for public servants, adding that he hopes ” there too, we will be able to obtain broader relief for borrowers”.

Fabiola Rodriguez, deputy press secretary at the Department of Education, said in a statement that the agency was “pleased to see the outcome of this case.”

“Since day one, the Biden-Harris administration has worked to protect borrowers and hold student loan servicers accountable, including renewing partnerships with state attorneys general to create a more comprehensive approach to oversight,” Rodriguez said. The agency looks forward to “continuing our work with state and federal regulators to create higher standards for servicers and combat service practices that harm borrowers,” she added.

Borrowers covered by the settlement will not have to take any steps to benefit from the relief. In the case of private debt cancellation, Navient will send borrowers a notice along with repayments of all loan payments they have made by June 30 this year. Eligible federal borrowers will receive a postcard in the mail regarding the settlement. They don’t have to do anything to receive aid, but should make sure they have an account on studentaid.gov and that their contact information is correct.