This past Thursday, the Consumer Financial Protection Bureau (CFPB) announced that Navient has been ordered to pay $120 million for multiple unethical practices and is now prohibited from servicing federal student loans. This is not the first instance in which Navient, along with its predecessor Sallie Mae, has encountered legal penalties stemming from allegations of misleading and harming student loan borrowers.
From Sallie Mae to Navient
Navient, originally a part of Sallie Mae, has been a significant player in the student loan servicing industry. Its primary responsibilities included managing loans under the Federal Family Education Loan (FFEL) program and Direct Loans. When Navient spun off from Sallie Mae in 2014, it began overseeing accounts for 12 million student loan borrowers, handling approximately $300 billion in federal and private student loans.
Previously, Navient served as a federal student loan servicer, servicing federal Direct Loans on behalf of the U.S. Department of Education. However, in 2021, Navient voluntarily ended its contract amid growing scrutiny of its servicing practices.
2017 CFPB Lawsuit
In 2017, the CFPB, alongside the attorneys general of Illinois, Pennsylvania, and Washington, filed a lawsuit against Navient, alleging violations of the Fair Credit Reporting Act and the Fair Debt Collection Practices Act. This recent settlement arises from that initial complaint.
The CFPB accused Navient of multiple infractions, including misleading borrowers regarding income-driven repayment plans, mishandling payment processing, and negatively impacting the credit scores of disabled borrowers, including severely injured veterans. Additional allegations included deceiving borrowers about the requirements for cosigner release and providing misleading information on improving credit scores and the implications of federal student loan rehabilitation.
Lawsuit Settlement
Navient's settlement with the CFPB involves a substantial $120 million fine. Of this amount, $20 million is categorized as a penalty, while $100 million is earmarked for compensating affected borrowers. This financial penalty aims to serve both as a reprimand and restitution for the harm caused to borrowers. Additionally, the CFPB has filed a proposed order to prevent Navient from servicing federal Direct Loans. If the court approves this order, Navient will also be barred from directly servicing or acquiring most loans under the FFEL program.
Navient's Settlement Response
In response to the CFPB's announcement, Navient released a statement asserting that they have settled to put the decade-old issue behind them. However, they maintain that they do not agree with the CFPB's allegations.
Some find the ban on federal servicing unnecessary, as Navient voluntarily ended their federal servicing contract with the U.S. Department of Education several years ago.
Navient’s Challenged Past
This recent settlement is not Navient's first brush with the law. In 2022, Navient settled with 39 state attorneys general, agreeing to cancel $1.7 billion in student loan debts. This settlement stemmed from allegations that Navient had steered students into costly forbearance options rather than informing them about more affordable, income-driven repayment plans.
Navient's former owner, Sallie Mae, has also faced its fair share of legal challenges. Allegations against Sallie Mae included offering subprime private loans to vulnerable borrowers who were likely to default.
The Impact on Borrowers
The $100 million in compensation aims to address the harm caused by Navient's practices. However, eligibility for relief is limited to a small group of borrowers specified in the settlement. Affected borrowers will not need to take any action, as the checks will be mailed directly by the CFPB.
The CFPB is encouraging all student loan borrowers to stay vigilant regarding their accounts, as financial settlements often attract scam companies looking to exploit them. Importantly, the CFPB has stated that no payment will be required for eligible borrowers to receive compensation. Furthermore, borrowers will not need to provide personal information to cash their redress checks.
Federal Student Loan Oversight
For both borrowers and financial advisors, this development highlights the critical need to remain informed, proactive, and vigilant. By understanding your rights and options, you can take charge of your student loan repayment journey and work towards a financially secure future.
Federal oversight of student loans is an ongoing initiative led not only by the CFPB but also by the U.S. Department of Education. The Department employs dedicated teams to monitor student loan accounts, oversee federal loan servicing, and collaborate with participating financial aid offices. Additionally, the Department's Office of Inspector General continuously investigates cases of fraud, ensuring accountability within the system.