Behind the Dizzying Student Loan Game Navient Allegedly Played

The feds claim that the nation’s largest servicer gave rushed, costly advice. Here’s how they say it worked.
Illustration text adapted from studentaid.ed.gov; Photographer: Teresa Guerrero/Getty Images

The U.S. government’s $1.3 trillion student loan program has a dizzying array of repayment plans that can overwhelm borrowers. That’s one of the things loan servicers are supposed to help with.

Navient, the nation’s largest student loan servicer, handles accounts for more than 1 in 4 Americans who owe money for their higher education. The company sends borrowers their monthly bills, collects payments, and counsels them on their options. Government lawsuits filed on Jan. 18 accuse Navient of taking shortcuts that minimized its costs. They say that hurt some borrowers who could have paid off debt more quickly, while simultaneously putting distressed borrowers in more debt by steering some into plans that put off payments—leading to ballooning balances—instead of income-based repayment programs. Regulators estimate that households’ debt burden may have been inflated by billions of dollars.

Navient has called the allegations unfounded and “agenda-driven,” noting in a statement that the U.S. Consumer Financial Protection Bureau’s case was filed just before the end of the Obama administration. Along with the CFPB, the attorneys general of Illinois and Washington state also sued. Authorities say they reviewed thousands of pages of company documents, analyzed thousands of consumer complaints, and listened to recordings of hundreds of phone calls between the company and consumers during a yearslong investigation.

Student loan servicing is a low-margin, high-volume business: It doesn’t cost much to service an account for a borrower who pays automatically through her bank account. For those who are late on their payments, however, a servicer can rack up expenses that are “many, many multiples” of the average servicing cost, Steven McGarry, chief financial officer at student lender Sallie Mae, told investors on Jan. 19. Navient was split off from Sallie Mae in 2014.

Borrowers with federal loans are eligible for help, but a servicer may have to go the extra mile to get them in the most appropriate program and keep their paperwork up to date. Dilu Nicholas’s troubles with Navient began after he enrolled in a plan that allows a struggling borrower to make payments pegged to earnings rather than loan balances. Borrowers must annually recertify their income information to stay on the plan.

Nicholas, of Louisville, attended one year of college in the early 1990s before dropping out to care for his ailing grandfather. After working steadily for more than a decade, he began school again, graduating from a state college, but found he couldn’t afford his monthly student loan payments. The income-based plan was a godsend.

Nicholas, now 42, missed an annual deadline, resulting in the addition of $7,000 to his federal loan balance, now almost $80,000. Navient did send e-mail reminders about deadlines. Nicholas remembers one that told him to retrieve a message on the company’s site, but its importance wasn’t clear.

The lawsuits allege this was common for Navient. Over more than four years, e-mail reminders directed borrowers to log on to their account without telling them why. For almost three years, reminders in the regular mail didn’t provide borrowers the date of their deadlines. The company changed its e-mail practices around March 2015. Since then its income-based plan recertification rate has more than doubled, the consumer bureau says.

Another problem at Navient, authorities claim, was that people ended up in plans that didn’t make the most financial sense for them. A borrower who sees a drop in pay could, like Nicholas, ask to switch to an income-driven plan. A person in those plans can earn credit toward eventual loan forgiveness, and if their income is low enough the monthly payment could be zero. A borrower can also simply ask to postpone payments. That’s an easy idea to understand. But the borrower may accrue more interest—and eventual forgiveness isn’t part of the deal.

The CFPB says borrowers were steered into such short-term forbearance too often. It estimates that from January 2010 to March 2015, as much as $4 billion in extra interest charges was added to principal balances of loans repeatedly put in forbearance. The reason, authorities claim, was simple: Postponing payment is easier and cheaper for the servicer. “Navient chose to shortcut its obligations,” said CFPB Director Richard Cordray in a conference call with reporters.

In 2013, before Sallie Mae split off its servicing business as Navient, its chief executive officer said in an earnings call that “it’s very expensive work, for example, to enroll a borrower into something like an income-based repayment program … which we are doing. But we don’t actually get paid for outperformance in that side of the equation.” The CEO, Jack Remondi, now leads Navient.

Chart: Navient share price

The state of Illinois lawsuit claims that Navient for years promised higher pay to its customer service representatives to rush borrowers off the phone. One former, unnamed employee is quoted saying that bonuses were paid for calls that lasted less than six minutes. A review of call recordings by investigators showed that plans that postponed payments were frequently mentioned in the first six minutes of the typical call. Half the time, Navient employees didn’t bother to mention income-based repayment plans.

Navient argues that this description is wrong. Many of the loans it services are owned by the government, which in 2010 became the only issuer for loans with federal backing. Of the four major servicers used by the Department of Education, Navient, at 40 percent, has the second-highest share of loan balances enrolled in income-based plans, according to the most recent government figures. The company also receives much less pay from the government for borrowers who postpone payments, “debunking claims that servicers have an incentive to place borrowers in forbearance” rather than income-based plans, according to a Navient statement.

That pay structure has been in effect only since September 2014. The earlier contract, which covered the previous five years, mandated that the government pay almost the identical amount to servicers for borrowers current on payments and for those postponing their payments. Navient has a similar arrangement for loans owned by private investors.

The lawsuits represent potentially billions of dollars in fines and restitution. But the CFPB’s future in a Donald Trump administration is a wild card. Many investors have already bet that Washington may become a friendlier place for Navient. The day after the election, the company’s stock shot up 17 percent, and even with the lawsuit it’s kept most of that gain.

The bottom line: A federal regulator says student loan borrowers may have accrued billions of dollars in avoidable interest charges.

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