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By Stacy Cowley and Tara Siegel Bernard
Navient, once one of the country’s largest student loan servicing companies, reached a $1.85 billion deal with 39 states to settle claims that it had made predatory loans that saddled borrowers with crushing debts they were highly unlikely to repay.
The deal, announced Thursday, requires Navient to cancel $1.7 billion in delinquent private student loan debts for nearly 66,000 borrowers and pay $95 million in restitution. The private loans were crucial to Navient’s ability to make a large volume of lucrative federal loans, prosecutors said.
“Navient repeatedly and deliberately put profits ahead of its borrowers — it engaged in deceptive and abusive practices, targeted students who it knew would struggle to pay loans back and placed an unfair burden on people trying to improve their lives through education,” said Josh Shapiro, the attorney general of Pennsylvania, one of several states that had sued Navient.
Most of those who took out the loans that will be forgiven under the settlement attended for-profit schools — like the defunct ITT Technical Institute — that often have low graduation rates and poor job-placement records. The private loans were — in Navient’s own words, according to legal filings — a “baited hook” to reel in more federally backed loans.
At some schools, Navient anticipated that more than 90 percent of the loans would default. But what it lost on the private loans was far outweighed by what it gained on the federal loans — guaranteed by the government — that students at those schools took out.
Under Education Department rules, no more than 90 percent of a school’s tuition payments can come from federal funding. The private loans were intended, according to court filings, to fill that gap and attract students who would then take out the lucrative federal loans that the schools — and Navient — relied on.
Navient, which did not admit any fault in the settlement, said in a statement that it did not act illegally. “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 Mark Heleen, Navient’s chief legal officer.
The deal, which covers only borrowers from participating states and Washington, D.C., would be life-changing for Ashley Hardin, who borrowed more than $150,000 to finance her dream of becoming a professional photographer.
“It is just a big weight lifted,” said Ms. Hardin, who told The New York Times about her struggle in 2017. “I am going to sleep better.”
Ms. Hardin enrolled in the Brooks Institute of Photography, one of the schools covered by the settlement, in 2006. After nearly a decade of payments, which included a period of forbearance, she fell into delinquency during the pandemic. Ms. Hardin, 38, said she had to choose between paying for health insurance or for her private student loans, which cost more than $1,025 a month.
Ms. Hardin, who now runs a sandwich truck with her husband in Seattle, hopes to have roughly $118,000 in debt wiped away.
“This has been a long time coming and justice was definitely served,” she said.
The settlement would end a major portion of a set of linked legal actions that began five years ago, when federal and state prosecutors sued the company, which was at the heart of the student debt collection system.
The Consumer Financial Protection Bureau sued in federal court over what it called mistakes and tactics by Navient that inflated borrowers’ bills by billions of dollars. Several state attorneys general also filed state lawsuits claiming that Sallie Mae — Navient’s predecessor company, from which it split off in 2014 — made private, subprime loans to borrowers it knew had weaker credit and were likely to default.
Those claims are the focus of the settlement that was announced on Thursday, but it also resolved the states’ charges that Navient inflated borrowers’ bills by steering federal loan borrowers into costly long-term forbearance instead of more affordable income-based repayment plans. The deal calls for payments of around $260 per person to be distributed to 350,000 borrowers who were placed in certain forbearance programs. The consumer bureau’s lawsuit, which also centers on those claims, is continuing.
Under the agreement, which was submitted to the U.S. District Court for the Middle District of Pennsylvania for approval, Navient will also pay the participating states $145 million.
If the settlement is approved, Navient will notify the borrowers whose debts will be forgiven. Details of the deal were posted by the participating states on a new website, NavientAGsettlement.com.
The loans that will be canceled, according to the proposed settlement, are past-due loans made in 2002 and after to borrowers at certain for-profit schools or through Navient initiatives, including its “Opportunity” and “Recourse” programs. The eligible schools include major for-profit chains like ITT and Corinthian Colleges, both of which have collapsed, as well as Bridgepoint Education, DeVry University and Education Management Corporation.
But some who attended those schools will still be left out: Navient agreed to eliminate the remaining balance on those loans only for people in locations that participated in the deal. Eleven states, including Texas, did not take part.
Students living in participating locations who attended public universities but received “nontraditional” loans — defined in the settlement as those made to borrowers who had a credit score below 640 at the time the loan was made — will also be eligible to have their delinquent loans wiped out.
Notably, students who were current on their loans as of June 30, 2021 — meaning they’re still paying their bills — will not have their loans canceled. Representatives for Mr. Shapiro, the Pennsylvania attorney general, did not immediately respond to a question about why those loans were left out of the settlement.
While the eliminated loans will be a great relief to the borrowers who took them out, most of the debts Navient is agreeing to wipe out are long-overdue loans for which it was already unlikely to be repaid. Navient valued the $1.7 billion it agreed to forgive at just $50 million — the total it expected it would ever be able to recoup, the company said on Thursday in a regulatory filing.
The federal consumer bureau declined to comment on Thursday. Navient appeared willing to resolve the bureau’s investigation in the final months of the Obama administration, but the talks broke down after President Donald J. Trump’s victory in 2016. The agency, long a target of criticism from Republicans, sued Navient two days before Mr. Trump’s inauguration, and the litigation outlasted his administration.
Navient decided last year to get out of the federal student loan business. It ended its contract with the Education Department, which allowed the company to transfer its 5.6 million borrower accounts to a new vendor, Maximus, which does business as Aidvantage.
But the company retained a portfolio of private student loans worth billions of dollars, and it later resumed that line of business. Navient has issued $17 billion in new private loans since it split from Sallie Mae.
“This is an enormous win for people with student debt,” said Mike Pierce, the executive director of the Student Borrower Protection Center. “We’ve spent lot of time thinking and talking about how to fix the federal student loan system, and we often ignore how many extremely economically vulnerable people are stuck with these private student loans that are destined to fail.”
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