On the front page of its website, Navient, the nation’s largest servicer of both federal and private student loans, states, “Loan Customers: We are here to help you successfully navigate paying your student loans.”

On another page, Navient states that its philosophy is “to use our deep expertise to help our customers succeed,” and to do so with its “commitment to the highest standard in loan servicing, asset recovery, and customer support.”

A lawsuit filed in January by the Consumer Financial Protection Bureau says otherwise, alleging that Navient provided borrowers with bad information, processed payments incorrectly and failed to respond to borrower complaints.

Navient was split off as a separate company by Sallie Mae in 2014. It services more than $300 billion in federal and private loans from 12 million borrowers, more than 6 million of whom come from its contract with the U.S. Department of Education. Loan servicers collect and process payments and communicate with borrowers. A loan servicer is not necessarily the same company that has loaned the money, and borrowers have no choice over their loan servicer. (See: Can Sallie Mae Loans Be Forgiven?)

The CFPB gave Navient the opportunity to settle, but Navient refused, stating that it would “not agree to false assertions and practices that would hurt consumers.” Navient further argued that the CFPB’s claims are unfounded and that the bureau “seeks to impose penalties on Navient based on new servicing standards applied retroactively and applied only against one servicer.”

Why the CFPB Sued Navient

The bureau alleges that Navient has caused many borrowers to pay more than necessary for their student loans by steering struggling borrowers into forbearance repayment plans rather than the income-driven plans that would be less expensive and more helpful to borrowers in the long run. Income-driven repayment plans reflect the borrower’s current economic circumstances and provide loan forgiveness after 20 or 25 years. By contrast, forbearance stops loan payments temporarily while interest continues to accrue, and forbearance does not change the borrower’s long-term payment relative to income.  (Learn more in Student Loan Debt: Is Consolidation the Answer? and Student Debt: Is Bankruptcy the Answer?)

In prepared remarks made in a January 18 press call, CFPB Director Richard Cordray stated that it is easier and cheaper for loan servicers to enroll borrowers in forbearance than in income-driven repayment plans.

“From January 2010 to March 2015, the company added up to $4 billion – that is with a ‘B’ – in extra interest charges to the principal balances of loans that were repeatedly enrolled in forbearance,” he stated. “Over this period, many affected borrowers contacted Navient multiple times for help, and Navient responded by extending the length of their forbearance. At any point in this process, Navient could have helped eligible borrowers get started instead on an income-driven repayment plan, but Navient failed to do so.”

The CFPB also alleges that Navient made it difficult for borrowers who were enrolled in income-driven repayment plans to fulfill annual renewal requirements, which may have substantially and unnecessarily increased their monthly payments.

“Taken together,” the court filing states, “these practices prevented some of the most financially vulnerable borrowers from securing some or all of the benefits of plans that were intended to ease the burden of unaffordable student debt.”

The CFPB seeks relief for the affected borrowers as well as a change in Navient’s practices to protect current and future borrowers. The bureau is concerned that part of the reason behind the high default rate on student loans might be related to problems in student loan servicing.

In addition, the CFPB is suing a Navient subsidiary, Pioneer Credit Recovery, for allegedly lying to defaulted borrowers who completed a federal loan rehabilitation program about the removal of negative items from their credit reports and the forgiveness of collection fees if they completed the program.

The lawsuit appears to have emerged from accumulated consumer complaints. In its 2016 Consumer Response Annual Report, the CFPB stated that 67% of the consumer complaints it received about student loans were related to dealing with the lender or servicer regarding processing payments, obtaining a documented loan account history, having an inaccurate account status reported to credit bureaus and having poor experiences with customer service when asking about repayment options or attempting to enroll in or switch between income-driven repayment plans.

Navient’s Response 

On March 24, Navient filed a motion to dismiss the CFPB’s suit.  Navient’s response to the lawsuit on its website states, “Our perspective is that the suits improperly seek to impose penalties on Navient based on new servicing standards applied retroactively and to only one servicer. We also believe the standards being asserted are inconsistent with U.S. Department of Education regulations, and could even harm student loan borrowers, including through higher defaults.” 

In its defense, Navient states that “the allegations in these lawsuits are false and we will vigorously contest them in court.” Navient says its customers “are far less likely to default on their federal student loans than borrowers serviced by other companies” and that 49% of the loan balances it services for the federal government are enrolled in income-driven repayment plans.

Regarding its practice of placing loans in forbearance, Navient says that almost 70% of borrowers who want to enroll in an income-driven repayment plan need to first have the account placed in forbearance. The reasons: It gives them time to gather the required documents and complete the federal income-driven repayment application without their account becoming past due, or their account is already past due and forbearance is the only way to cure the delinquency and allow the borrower to enroll in income-driven repayment, which requires the borrower to be current on payments.

Navient says it’s untrue that servicers have an incentive to place borrowers in forbearance instead of an income-driven repayment plan because servicers earn up to 60% less on these borrowers.  Navient also says its use of forbearance is in line with that of other servicers, and that some borrowers choose forbearance even when offered income-driven repayment plans.  Forbearance can help borrowers by preventing them from going into default, which harms credit.  (Learn more in Student Loans: What to Do When You Can’t Repay Them and The Worst Things that Can Happen If You Don’t Repay Your Student Loans.)

In response to charges about applying payments incorrectly, Navient states that most borrowers who filed complaints on this matter had not included instructions to Navient about how they wanted the payment allocated or had mailed their payments to the wrong address, and Navient helped the affected customers to resolve the problems by reapplying payments upon request.

As for its loan servicing practices, Navient states on its website, “To help our customers successfully pay their education loans and build their credit, our Department of Education Loan Servicing provides financial literacy tools and in-depth customer service.” It says its collection services, including Pioneer’s, are “one of the largest, most responsible, most compliant and top performing collection operations in the country. We have recovered billions on behalf of taxpayers through multiple contracts with various government agencies and educational institutions.”  In a January press release, Navient also stated that the borrowers of the federal loans it services “are 31% less likely to default than their peers at other servicers.”  (For more, see Student Loan Forgiveness: How Does It Work?)

What's more, Navient stated in its motion to dismiss the case: "There is no expectation that the servicer will 'act in the interest of the consumer'"

The Bottom Line

It has yet to be determined in court whether Navient is guilty of the alleged practices. All we have to go on right now is what each side has said about these matters. If Navient is found guilty, another question to answer will be whether it systematically engaged in these practices to increase its profits, whether its staff was incompetent or both. Being found not guilty would be good news for Navient, but it may still need to find a way to address the concerns the lawsuit has brought up to avoid similar charges in the future. 

Further, this lawsuit illustrates the importance of borrowers educating themselves about their loan rights and repayment options and not relying on what a customer service representative tells them. The loan servicer’s primary customer is the creditor it collects payments on behalf of, not the borrower.  (For further reading, see 10 Tips for Managing Your Student Loan Debt and Who Actually Owns Student Loan Debt?)