Navient reached a $1.85 billion settlement with 39 states and agreed to cancel about 66,000 student loans to resolve claims the company used predatory lending practices.
The biggest chunk of the settlement value comes from the cancellation of $1.7bn in loans taken since 2002, according to statements by the company and state attorneys general. The state officials said Navient promised to help struggling borrowers find affordable repayment plans but instead steered them into expensive long-term repayments.
“The bottom line is this: Navient knew that people relied on their loans to make a better life for themselves and for their children,” Pennsylvania Attorney General Josh Shapiro said Thursday at a press conference. “Instead of helping them, they ran a multimillion-dollar scam.”
The investigation of Navient by the states and the US Consumer Financial Protection Bureau had been previously reported, as had overtures at settlement talks. A Bloomberg Intelligence analysis in December estimated the company’s financial exposure at more than $500m. Shares gyrated on the news but were little changed in midday trading Thursday.
The company denied wrongdoing and said the allegations were “based on unfounded claims,” according to a statement by the company’s chief legal officer, Mark Heleen.
Navient, based in Wilmington, Delaware, manages roughly a quarter of the nation’s student loans. It was created in 2014 in a spin-off from US-backed loan generator Sallie Mae.
Navient allegedly originated predatory subprime private loans to students attending for-profit schools and colleges with low graduation rates, even though it knew that a very high percentage of such borrowers would be unable to repay the loans.
The California Attorney General’s office said the average amount of the cancelled loan balance per borrower is about $25,750, and that some borrowers may have more than one loan cancelled.
In addition to the loan cancellations, Navient will pay an additional $142.5 million to the states, including a total of $95m in restitution payments of about $260 each that will be distributed to approximately 350,000 federal loan borrowers who were placed in certain types of long-term forbearances. That makes the total settlement about $1.85bn.
Loan servicers, like mortgage servicers, play an important role in the student debt system made up of government-originated loans and those made by private lenders. As a servicer, Navient sends borrowers their monthly bills, collects payments, and counsels them on their repayment options.
When borrowers are in forbearance, their payments are pushed off as interest accrues. Payments for income-driven repayment plans for government loans are based on what a borrower earns and, in some cases, could be zero dollars. Their balances can be forgiven after a certain number of years — 20 or 25 years — or 10 years in the case of the Public Service Loan Forgiveness program.
“As it stands right now, nearly 45 million Americans owe more than $1.8 trillion in debt,” Mr Shapiro said. “By the way, I’m one of them. I’m still paying off my student debt.”
The attorneys general said that borrowers who are eligible for repayments will automatically receive them in the mail.