Navient reaches a deal to cancel $1.7 billion in student loan debts

The loan servicing giant Navient has agreed to cancel $1.7 billion in student loan debts owed by roughly 66,000 borrowers as part of a settlement the company reached Thursday with 39 state attorneys general.

The settlement ends a years-long legal fight with states in which Navient faced two serious allegations. First, that the company had steered student borrowers into expensive forbearances instead of more flexible, income-driven repayment plans.

Updated January 13, 2022 at 4:02 PM ET

The reason for this steering, says Persis Yu, managing counsel at the Student Borrower Protection Center, is that enrolling a borrower into an income-driven repayment plan takes considerable effort on the part of a loan servicer.

"There is paperwork that must go back and forth. It's just more work for the servicer. It's very easy for the servicer to put a borrower into a forbearance, and there is evidence that the call center workers were incentivized to get through these calls as quickly as they possibly could," Yu says. "And that meant getting people into quick, easy options — not necessarily the best option for the borrower."

A 2019 audit by the U.S. Department of Education's Office of Inspector General corroborated this allegation, finding Navient phone counselors repeatedly recommending forbearance to borrowers without mentioning other, more flexible repayment options.

As part of the settlement, Navient agreed to pay $95 million for states to offer affected borrowers some reimbursement — roughly $260 each to 350,000 borrowers.

The company also faced allegations that its predecessor, Sallie Mae, had made subprime private loans to vulnerable borrowers it knew were likely to default.

States alleged that these private loans were made in cooperation with some for-profit colleges, many with incredibly low graduation rates, as a way of enticing these schools to rely on the company for other student loans as well.

In order to qualify for the federal government's student loan program — a vital lifeline for colleges and universities — schools must also show that at least some of their revenue is coming from other sources, including private student loans, says Eileen Connor, director of the Project on Predatory Student Lending.

Connor says Sallie Mae would issue risky, high-interest private loans to some of a school's borrowers with the understanding that the school would then recommend other students also use Sallie Mae for their federal student loans. In many cases, the schools also promised to repay Sallie Mae if students eventually defaulted.

"Even if they maybe did take a little bit of a loss" on those risky private loans, Connor says, "it was worth it to [Sallie Mae/Navient] because it allowed them to be the preferred lenders on the federal loans for these schools. And so that meant that they would have this really large volume of guaranteed loans also. But this time the guarantee was coming from the government, so it's like they were covered. Either way, the people who were really screwed were the students."

For these affected students, Navient agreed to cancel $1.7 billion in current debts.

"Navient repeatedly and deliberately put profits ahead of its borrowers," said Pennsylvania State Attorney General Josh Shapiro, a leading voice behind the legal fight.

The Department of Education welcomed the settlement.

"We are pleased to see the outcome of this case and look forward to continuing our work with state and federal regulators to create higher standards for servicers and address servicing practices that hurt borrowers," Fabiola Rodriguez, the department's deputy press secretary, said a statement.

In a statement, though, Navient made clear this settlement should not be taken as an admission of guilt.

"The company's decision to resolve these matters, which were based on unfounded claims, allows us to avoid the additional burden, expense, time and distraction to prevail in court," said Navient Chief Legal Officer Mark Heleen in a statement. "Navient is and has been continually focused on helping student loan borrowers understand and select the right payment options to fit their needs."

In September 2021, Navient announced that it would be exiting the federal student loan program and handing off its portfolio to a new servicer. [Copyright 2022 NPR]