Lawsuit against student-loan servicer Navient alleges it wronged borrowers

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Navient, formerly known as Sallie Mae, services the student loans of millions. It calls the federal allegations unfounded.

Do you or your college kids have student loans serviced through Navient?

A federal lawsuit filed against the giant loan-servicing company last week alleges all kinds of nasty behavior. Navient handles the loans of many of the 41 million Americans who collectively owe $1.2 trillion in student debt -- now the second-largest class of consumer debt, behind mortgages. 

Formerly known as Sallie Mae, Navient is the largest U.S. student-loan servicer, with 12 million-plus borrowers, more than six million of them through a contract with the U.S. Department of Education, and more than $300 billion in federal and private student loans.

If you have a federal loan, here's how Navient may have hurt you, according to the Jan. 18 lawsuit filed by the Consumer Financial Protection Bureau (other major student-loan servicers include PHEAA in Pennsylvania, Great Lakes in Wisconsin, and Nelnet in Nebraska, but they were not named in the suit):

Most federal student-loan borrowers have a right to set their monthly loan payments as a share of income. It's known as "income-driven" repayment and is touted by the Education Department as a way to keep those borrowers out of default. 

Navient made it difficult for those who tried to arrange income-based payment, the suit says, and steered them into "forbearance" arrangements, "costly payment relief designed for borrowers experiencing short-term financial problems, before or instead of affordable long-term repayment options that were more beneficial to them."

What about those who did enroll in long-term repayment plans? Navient failed to disclose the annual deadline to renew or obscured its renewal notice, the lawsuit, filed in U.S. District Court for the Middle District of Pennsylvania, says. "As a result, the affordable payment amount expired for hundreds of thousands of borrowers, resulting in an immediate increase in their monthly payment," the suit says.

If you filed a complaint about Navient, you are among tens of thousands of borrowers and co-signers who have done so since July 2011. If you want to file a complaint, go to consumerfinance.gov and click on "consumer tools" or call toll-free at 855-411-2372. 

With loan co-signers, Navient also got a failing grade, the agency's lawsuit says, making it difficult for co-signers to be released from private student loans. It repeated the same errors in processing federal and private student-loan borrowers’ payments month after month, even after borrowers complained.

Meanwhile, the Department of Education encouraged students and their parents to consult their federal student-loan servicers to determine the best repayment option or alternative for that individual borrower. On its website, the DOE advises borrowers to contact their loan servicers before applying for any alternative repayment plan or forbearance, with statements such as: “Before you apply for an income-driven repayment plan, contact your loan servicer if you have any questions. Your loan servicer will help you decide whether one of these plans is right for you," and “Always contact your loan servicer immediately if you are having trouble making your student loan payment.”

More than half the Navient borrowers who needed payment relief were eligible for income-driven repayment plans, qualifying for a $0 monthly payment. Instead, they never got that option, the CFPB alleges. 

Navient enrolled borrowers in multiple consecutive forbearances -- at a cost of $4 billion. Had they been enrolled in income-driven repayment plans, many of them would have avoided many or all of the additional charges because the government covers unpaid interest on subsidized loans in full during the first three years.

(Read the full complaint at http://files.consumerfinance.gov/f/documents/201701_cfpb_Navient-Pioneer-Credit-Recovery-complaint.pdf.)

Navient rejected the lawsuit as an ultimatum to settle the case by Inauguration Day. "The allegations of the Consumer Financial Protection Bureau are unfounded, and the timing of this lawsuit — midnight action filed on the eve of a new administration — reflects their political motivations," it said in a statement.

In 2014, Navient disclosed that it had been given investigative demands by the CFPB, and in 2015 received a notice of possible legal action. The lawsuit also named two Navient subsidiaries, Navient Solutions and Pioneer Credit Recovery.

"We had hoped our extensive engagement with the regulators would achieve this objective. Instead, the suit improperly seeks to impose penalties on Navient based on new servicing standards applied retroactively and applied only against one servicer," the company said. "The regulator-asserted standards are inconsistent with Department of Education regulations, and will harm student-loan borrowers, including through higher defaults."

Consumer advocates said the lawsuit was overdue.

“When student loan borrowers make a mistake, companies hold them accountable with immediate penalties and negative credit reporting. But too often, it seems that those same companies have immunity when they break the law. Those days appear to be over," said Rohit Chopra, senior fellow at the Consumer Federation of America, and formerly assistant director and student loan ombudsman at the Consumer Financial Protection Bureau. 

"Like the Wells Fargo fake account scandal, Navient allegedly incentivized employees to push borrowers into forbearance plans, instead of helping them sign up for affordable repayment options. If true, this means that the company’s actions may be leading to excessive interest charges and unnecessary defaults," he added.