Student-Loan Processor Navient to Cancel $1.7 Billion of Debts

A former unit of student loan giant Sallie Mae said it would cancel $1.7 billion in private student debt for 66,000 borrowers to settle claims it engaged in deceptive lending practices.

Navient corp.

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He agreed to the amount in a settlement with 40 state attorneys general. The loans are private loans, so losses will be covered by Navient investors rather than the federal government.

Nearly all of Sallie Mae’s canceled loans originated from 2002 to 2010, at a time when student debt was soaring, on its way to becoming the second highest form of household credit after mortgages. Sally May has been at the forefront of that boom, as the largest source of private loans as well as the largest lender under a federal program that guarantees student loans.

The loans primarily went to borrowers with poor credit, who attended schools with shaky records, including many for-profit schools, according to a website operated by a settlement official. All loans ceded in the agreement were in default.

“For far too long, Navient has contributed to the national student debt crisis by disingenuously trapping thousands of students in further debt,” said New York Attorney General Letitia James.

As part of the agreement, Navient has continued to reject allegations that the company has harmed any borrowers. “The company’s decision to resolve these matters, which was based on unsubstantiated allegations, allows us to avoid the additional burden, expense, time and distraction in court,” said Mark Helen, Navient’s chief legal officer.

Navient has faced several lawsuits in recent years alleging the company engaged in unfair and deceptive behavior against borrowers, including directing those with federal loans toward plans that would allow them to stop making payments but interest continued to accrue, rather than Plans in monthly payments linked to the borrowers’ income.

In March, a Seattle-area judge ruled that the company had violated consumer protection law in a case brought by the Washington attorney general.

“Time and time again, Navient advances profits before borrowers — it has engaged in deceptive and abusive practices, targeted students who I knew would struggle to repay loans and placed an unfair burden on people trying to improve their lives through education,” Pennsylvania Attorney Josh Shapiro said.

Melissa Korn, the Wall Street Journal’s higher education correspondent, breaks down select groups of borrowers who currently qualify for student debt relief and what borrowers can expect next year. Photo: Getty Images

Lindsey Clark hopes the settlement will apply to her.

Clark, 32, who works in Washington, D.C., says she took out about $100,000 in student loans while earning her bachelor’s degree from Yale University and her master’s degree from Columbia University, where she studied international affairs. Since then, her debt has ballooned to $206,000 after she repeatedly put her loans into repayment, limiting her monthly payments while interest accumulates.

She said she was naive when it came to her student debt but blames Navent for guiding her toward the Patience scheme without fully informing her of the consequences.

When she heard about the settlement she was happy at first.

“I thought it was great, they were finally brought to justice,” she said.

The company said the agreements resolve all six of the country’s outstanding lawsuits against Navint. As part of the settlement, the company will make a one-time payment of approximately $145 million to the states.

In addition to loan cancellation and some compensation for borrowers with private loans, Navient will pay $95 million to about 350,000 federal borrowers — or about $260 each — who have been put into certain types of forbearance programs that have accumulated more debt rather than going in, she said. States reimbursement plans based on income.

States will distribute compensation to borrowers within their jurisdiction. State Attorney General Maura Healey said Massachusetts, for example, will receive more than $6 million, including $2.2 million in compensation for more than 8,300 federal borrowers.

Eligible federal loan borrowers for refunds will be notified by mail this spring, with checks coming out mid-year, according to the settlement official’s website. Private borrowers who qualify for a release will be notified by July.

Private loans without federal support make up less than 10% of the total $1.7 trillion student loan industry. Department of Education data shows that about 43 million people owe $1.6 trillion in federal student debt. About 5.2 million of those federal borrowers are in default. Those borrowers, unless they also have private student loans, will not be affected by Thursday’s settlement.

Navient recently announced its exit from processing federal student loans. It was one of the primary federal contractors, serving about six million borrowers. Its accounts were transferred to the new contractor, Maximus, whose role was approved by the Ministry of Education.

The Education Department has also taken steps to waive billions of debt owed to disabled borrowers, as well as borrowers who have gone to institutions that federal regulators say have engaged in deceptive recruitment practices, such as the ITT Technical Institute. The partial steps resulted in $11.5 billion in debt canceled by nearly 600,000 borrowers during President Biden’s first year in office. The government has suspended student loan payments during the pandemic, with the latest extension set to expire on May 1.

The Biden administration is in the midst of restructuring the student loan processing system. In November, it announced it was ending its relationship with the private collection agencies tasked with recovering payments from federal borrowers for delinquent student loans to improve collection and provide borrowers with more support.

The Consumer Financial Protection Bureau has been suing Navient since 2017 over allegations that it directed borrowers to defer payments rather than enter into low-cost, income-based payment plans. The CFPB said the practice is costing borrowers $4 billion in interest. Navient disputed the government’s allegations.

write to Gabriel T. Rubin at gabriel.rubin@wsj.com and Douglas Belkin at doug.belkin@wsj.com

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