The Consumer Financial Protection Bureau and state attorneys general in Illinois and Washington filed lawsuits against Navient, the nation’s largest servicer of student loans, accusing it of extensive mistakes and violations.
Navient denied all wrongdoing, and said it had “a well-established, superior track-record of helping student loan borrowers succeed in repayment.”
Below are seven ways in which Navient was accused of misleading or cheating borrowers.
1. Steering borrowers away from income-based repayment plans
Most borrowers with federal student loans are eligible for an income-based repayment plan, but navigating the thicket of different plans can be complicated.
Helping a borrower sort through them and processing all of the required paperwork takes time. Navient “systematically deterred” its customers from enrolling in income-based plans by instead steering them toward other options that were simpler for the company, according to the lawsuits.
In particular, the company is said to have pushed many customers toward forbearance, which lets borrowers stop making payments for up to 12 months — though interest continues accruing. That is why forbearance is intended only as a short-term fix for problems like an illness or a temporary hardship.
For borrowers with more fundamental financial constraints — like large loan payments and a small or nonexistent paycheck — an income-based payment plan is generally a better option. Many of Navient’s troubled borrowers would have qualified for a $0 monthly payment, the consumer bureau said.
Navient enrolled at least 1.5 million borrowers in two or more consecutive forbearances totaling 12 months or longer, and 520,000 borrowers were enrolled in at least four forbearances, according to the lawsuits.
Borrowers with multiple forbearances ended up owing an additional $4 billion in interest.
The Education Department pays Navient to collect payments on federal loans. In a legal response to the consumer bureau’s lawsuit, Navient said that the terms of its federal contract do not call for the kind of individual counseling that the consumer bureau said it should have provided.
2. Obscuring renewal deadlines for borrowers enrolled in income-based repayment plans
Many of Navient’s customers — nearly half of those with direct federal loans, according to Navient — did manage to enroll in income-based repayment plans.
Borrowers in those plans must send in paperwork every 12 months to renew their applications. If they don’t, they get dropped from the program. That sets off a domino chain of bad consequences, including higher monthly payments and lost interest subsidies.
Navient failed to alert its customers adequately to the deadlines and the effects of not renewing, according to the lawsuits. From July 2011 until March 2015, some 60 percent of Navient’s customers did not renew on time.
For at least three years, Navient’s renewal notices did not mention the actual date by which the application was due, and the warnings it sent were often vague. For several years, the notices sent by email had the subject lines, “Your Sallie Mae Information” or “New Document Ready to View.”
In March 2015, Navient changed the email subject line to “Your Payment Will Increase Soon!” Its renewal rate quickly doubled.
3. Handling payments incorrectly
Navient often made mistakes in how it processed incoming payments, especially those made by check, according to the lawsuits.
When borrowers sent in lump-sum payments with instructions to pay off a specific loan, Navient sometimes instead divided the payment among all of the loans in the borrower’s account, the consumer bureau said.
Instructions from co-signers about how their payments should be allocated were also ignored, according to the lawsuits, in part because Navient’s mail-reading equipment did not detect the written notes.
The company did not have the technology and systems it needed to catch errors and stop them from recurring, according to the complaints, which meant that mistakes often happened over and over again. In one customer’s case cited in the Illinois state lawsuit, Navient “acknowledged the repeated errors that occurred each month but offered no solutions.”
4. Misrepresenting how to release a co-signer
Many of Navient’s private student loans — those made outside the federal loan program — required borrowers to obtain a co-signer, who is legally on the hook for making sure the loan is repaid.
Borrowers are usually allowed to release their co-signers after a minimum number of on-time payments have been made, but Navient created obstacles that made releases “deceptively difficult” to obtain, according to the lawsuits.
In particular, Navient is said to have manipulated the way it counted larger-than-required payments.
When borrowers send in extra money, they have the option of applying the overpayment to their next bill. If someone sent in $200 for a $100 loan bill, they could opt to skip their next monthly payment.
To release a co-signer from a loan, Navient requires the borrower to make a minimum number — usually 12 — of “consecutive, on-time payments.” But if someone did not make a payment one month because their bill was $0, Navient treated that as a failure to make “consecutive” payments — and it then reset the borrower’s consecutive-month payment count to zero.
Navient did not make that rule clear to borrowers, the consumer bureau said, which left many confused about why their co-signer release requests had been denied.
5. Misrepresenting the effects of loan rehabilitation
Borrowers who default on their federal loans can use a process called rehabilitation to dig out.
But Pioneer Credit Recovery, Navient’s debt-collection subsidiary, “systematically misled” borrowers about the positive effects that rehabilitation would have on their credit reports, and overpromised on how much of the defaulted loan’s collection fees would be forgiven, according to the consumer bureau.
6. Misreporting information to credit bureaus about disabled borrowers
If borrowers become “totally and permanently” disabled, they are eligible to have their federal student loans discharged.
Lenders are supposed to report such loans to credit bureaus with a specific code. Navient incorrectly used a different code indicating that the loan had defaulted, according to the lawsuits.
That left disabled borrowers with black marks on their credit reports, which could prevent them from obtaining credit cards, mortgages and other loans. Some of those affected were military veterans who were injured while serving, the consumer bureau said.
7. Making predatory loans to students likely to default
Illinois and Washington added a charge to their cases against Navient. From 2000 to 2009, Navient’s predecessor company, Sallie Mae, from which it split off in 2014, made private, subprime loans to borrowers it knew were likely to default, the state attorneys general said.
The company’s motive was to cement its place on various schools’ “preferred lender” lists and increase its share of their government-guaranteed federal loans, according to the states. Sallie Mae’s private loans often went to students at for-profit schools with low graduation rates. At one school, the company calculated its expected default rate on private loans at 70 percent.
The subprime loans “had virtually no intrinsic value to Sallie Mae” and were essentially treated as a marketing expense, according to the lawsuits. The company could afford to write off the bad debt, but borrowers remained on the hook for billions.