America’s student loan giant is facing a challenge from one of the biggest states in the country.
Xavier Becerra, California’s attorney general, said Thursday he’ll file a lawsuit against NAVI, -0.15% alleging that the student-loan servicer threw roadblocks in the way of borrowers successfully repaying their loans in violation of California law.
“Navient’s loan servicing abuses have compounded the misery of parents and students who sacrificed to pay for college,” Becerra said in a statement announcing the lawsuit. “Our students can’t afford to be cheated out of any more money than they legally owe simply because Navient knew how to game the system.”
Jack Remondi, Navient’s chief executive, criticized the forthcoming suit in a statement, calling the allegations “unfounded,” adding that the company plans to “vigorously defend itself.”
“The lawsuit is another attempt to blame a single servicer for the failures of the higher education system and the federal student loan program to deliver desired outcomes,” he said. Remondi urged officials suing the company to instead focus on improving financial literacy, increasing graduation rates and simplifying the loan repayment process as a way to address the nation’s student loan problem.
California’s suit comes as many states and consumer advocates are locked in a battle with the Trump administration over how closely student loan companies and for-profit colleges should be regulated. State attorneys general, including Becerra, have challenged Betsy DeVos’s Department of Education over plans to rollback Obama-era rules that hold for-profit colleges accountable for misleading borrowers.
DeVos also issued a memo earlier this year saying that states can’t regulate student-loan servicers like Navient because any authority they have over the companies is superseded by the firms’ contracts with the federal government. That memo came in response to a handful of states enacting laws requiring student-loan servicers to follow certain consumer protection rules in their states.
Those state efforts came after years of complaints from borrower advocates who have derided servicers since the Obama era for not doing enough to work in borrowers’ best interest. Servicers are hired by the federal government to essentially be the major touch point for borrowers during the repayment process.
But advocates, attorneys general and others have said the companies are often not forthcoming enough about the less burdensome repayment plans and forgiveness options available to borrowers through the federal loan program, causing them to struggle unnecessarily.
They say this behavior by servicers exacerbates the nation’s $1.5 trillion student loan problem by making it more difficult for borrowers to get out from under their debt.
The Consumer Financial Protection Bureau as well as the states of Illinois, Washington and Pennsylvania have all sued Navient. The company has asked the courts to dismiss some of these cases, but hasn’t been successful yet.
The claims in the California case mirror many of those described in other suits. Becerra alleges that Navient steered struggling borrowers towards forbearance — a status where payments are paused but interest continues to build — when they would have been better served in an income-driven repayment plan.
Those programs are less onerous because they allow borrowers to pay off their debt as a percentage of their income. Advocates have argued that companies steer borrowers towards forbearance because it takes more work to enroll a borrower into an income-driven repayment plan. In the past, Navient has countered these accusations by noting that 53% of the student loan balances managed by the company are in income-driven repayment plans, according to its own data analysis.
The suit also claims that when borrowers threw extra money at their loans to pay them down faster, the company applied the overpayments to interest and fees instead of to the principal of their loan, despite telling borrowers they would apply the excess payment to principal. When an extra payment is applied to principal it lowers the amount on which interest is building, helping a borrower pay down the debt faster.
Becerra also alleged that Navient misrepresented the amount borrowers had to pay to become current on their loans and didn’t discharge the loans of borrowers who were eligible to have the debt wiped away due to a total and permanent disability.
In addition to suing Navient, Becerra also sued two of the company’s subsidiaries, Pioneer and General Revenue Corporation, which have worked as debt collectors on behalf of the federal government to recoup money from borrowers who have defaulted on their debts. In the suit, Becerra claims the companies misrepresented features of programs that defaulted borrowers use to become current on their debt.
