Navient, the nation's largest student loan servicer — and formerly part of Sallie Mae — was just hit with a federal lawsuit that alleges the company deceived borrowers to the tune of $4 billion.
Customers who took out student loans were hit with unnecessary interest payments, denied options to reduce their debt, and suffered damage to their credit scores, according to a lawsuit from the Consumer Financial Protection Bureau filed on Wednesday.
It's one of the Bureau's last actions before the transition to a GOP-led administration — one that has made no secret of its desire to defang or outright eliminate the regulator, which was put into place following the financial crisis to put oversight to all aspects of the financial services industry under one umbrella.
The CFPB sued Navient Corporation, along with subsidiaries Navient Solutions and Pioneer Credit Recovery. Altogether, the company services the student loans of more than 12 million borrowers, roughly half of whom are under a contract with the U.S. Department of Education.
Just between 2010 and 2015, the CFPB said Navient collected $4 billion in interest alone from pushing students into "forbearance" — that is, their payments were suspended but the debt continued to grow — rather than enrolling them in income-based repayment programs for which they were eligible.
Disabled and Veterans Had Their Credit Scores Pummeled
Borrowers who were disabled and suffered financial hardship — including injured and disabled veterans who were trying to earn a degree — had their loans reported to credit bureaus as in default rather than discharged, devastating their credit score.
"This is a huge hit to say you're in default on a federal loan versus having the entire loan balance forgiven. It's a huge difference," said Persis Yu, director of National Consumer Law Center's Student Loan Borrower Assistance Project.
With a record of default blemishing their credit, it would be difficult to impossible for these disabled borrowers to take out mortgages or other loans, open credit cards, and even pass background checks.
On Wednesday, the Attorneys General of Illinois and Washington also filed suit against Navient, claiming deceptive and predatory practices in the company's loan servicing and collection activities.
"My investigation found Sallie Mae put student borrowers into expensive subprime loans that it knew were going to fail," Illinois Attorney General Lisa Madigan said in a statement. Her suit also included Sallie Mae Bank and General Revenue Corporation, a collection agency and another subsidiary of Navient.
Washington state Attorney General Bob Ferguson also cited the forbearance abuse referenced in the CFPB suit, along with what he called "aggressive and misleading collection tactics" in announcing his suit.
"It really is incredibly galling that this has gone on this way for so long," said Suzanne Martindale, staff attorney at watchdog group Consumers Union. "They weren't even doing the most baseline competent servicing."
Navient denied the claims in a pair of press releases issued Wednesday and said it planned to fight the charges in court. The company characterized the complaints as "midnight action filed on the eve of a new administration" and blasted what it called "agenda-driven ultimatums."
Consumer advocates say the CFPB's investigation that uncovered the systematic failure and triggered the legal action is a sign that the agency's oversight is necessary.
"This is proof positive that the CFPB is doing exactly what it's supposed to be doing," Martindale said. "This would be such a kick in the teeth to regular working families to do something like dismantle it, disable it, or defund it."
But victimized borrowers could be waiting a long time for recompense. "Litigation can often be long and cumbersome," said Rohit Chopra, senior fellow at the Consumer Federation of America, and formerly the assistant director and student loan ombudsman at the Consumer Financial Protection Bureau. "It's hard to say when borrowers will start seeing debt relief."
Even if the agencies bringing the suit succeed, figuring out how and how much to compensate affected borrowers could be a challenge, particularly for indirect costs like being unable to obtain a credit card or rent an apartment because of an erroneous default on a credit report.
The Future of Consumer Advocacy
Given the impact student debt has on the financial stability of many Americans, especially young adults and the working class, consumer advocates say the Trump administration could find itself on the wrong side of voters if it guts the agency.
"They also have to be responsive to the real economic anxiety that's out there, especially among student loan borrowers," Chopra pointed out.
"We hope that the president-elect will see this as a reason to keep the CFPB strong," Yu said.
While individual Attorneys General can protect constituents in their own states, Yu argued that a more comprehensive solution is necessary to keep consumers safe from predatory companies. "The benefit of having the federal agency is to be able to protect all borrowers," she said.
But Chopra suggested that state participation could ensure that the case against Navient moves forward even if the CFPB's role is reduced or eliminated by the incoming administration.
"The political environment is not politically relevant because this action is being done in concert with states. When federal agencies and state Attorneys General get together, that reduces the chance a big company can lobby its way out of accountability," he said.