On September 12, 2024, the Consumer Financial Protection Bureau (CFPB) filed a stipulated proposed order in its suit against the student loan servicer Navient, formerly known as Sallie Mae. If entered, the order will resolve the claims in the CFPB’s January 2017 complaint, which accused Navient of forbearance steering and other breakdowns in its income-driven repayment program. Forbearance steering occurs when a borrower is placed in a general forbearance, even though the borrower would be better off in an income-driven repayment plan.

The CFPB’s investigation into Navient triggered a series of initiatives by both state and federal agencies to scrutinize forbearance steering and other issues within the income-driven repayment program. According to the CFPB, these efforts have led to over $50 billion in debt relief for more than one million borrowers who were improperly directed into forbearance or had their payments miscalculated. This order aligns with actions already undertaken by the Department of Education and state attorneys general to compensate borrowers affected by Navient’s practices.

When the CFPB filed its complaint in 2017, Navient was the largest student loan servicer in the United States. It serviced the student loans of more than 12 million borrowers, including more than six million accounts under its contract with the Department of Education. Altogether, it serviced over $300 billion in federal and private student loans.

The complaint alleges that Navient steered borrowers who may have qualified for income-driven repayment plans into forbearance instead. The complaint also alleges that Navient harmed student loan borrowers by misleading them about income-driven repayment plans, mishandling payment processing, harming the credit of disabled borrowers, deceiving them about Navient’s requirements for cosigner release, and misleading them about improving their credit scores and the consequences of federal student loan rehabilitation.

Impact of Navient’s Alleged Violations

In its complaint, the CFPB asserted that Navient’s practices violated the Consumer Financial Protection Act (CFPA), the Fair Credit Reporting Act, and the Fair Debt Collection Practices Act. Under the CFPA, the CFPB has the authority to act against institutions that violate consumer financial protection laws, including engaging in unfair, deceptive, or abusive acts or practices.

According to the CFPB, Navient’s unlawful steering practices were simpler for Navient to implement but detrimental to borrowers. By steering struggling borrowers into forbearance, where interest accrues and capitalizes, borrowers incurred additional interest charges. The bureau claimed Navient failed to adequately inform borrowers in income-driven repayment plans about the need to recertify their enrollment each year and that submitting incomplete or incorrect recertification applications could lead to increased monthly payments and delays in loan forgiveness. Additionally, many borrowers had multiple loans with varying interest rates and payment amounts. When borrowers made payments meant for multiple loans, Navient is accused of misallocating or misapplying those payments, causing late fees, additional interest, and negative impacts on their credit reports.

The CFPB also claimed that Navient’s practices damaged the credit of borrowers by failing to inform them about eligibility for certain discharges. Further, the CFPB alleged that Navient misled private loan borrowers by suggesting that certain payment methods qualified them for cosigner release, but Navient failed to honor this for some borrowers. Finally, the CFPB claimed that Navient’s debt collection division misrepresented the benefits of loan rehabilitation, falsely promising that completing a rehabilitation program would improve borrowers’ credit scores while failing to deliver on those assurances.

Settlement Terms

Under the terms of the CFPB’s proposed order, Navient will pay a $20 million penalty and provide $100 million in redress for harmed borrowers. In addition, Navient would be prohibited from participating in most federal student loan activities. The order would prevent Navient from servicing Federal Direct Loans and, with few exceptions, from acquiring Federal Family Education Loan Program loans. Navient would also be barred from performing consumer-facing servicing for the Federal Family Education Loan Program. For any remaining loans in which Navient acts as the master servicer, the order mandates that Navient implement several measures to protect borrowers’ rights, including their ability to enroll in more affordable repayment plans.

Final Takeaways

While the settlement will end a decade-old issue between the CFPB and Navient, it will not be the end of the CFPB’s focus on student loans. Over the past several years, the CFPB has persistently shown that it is closely scrutinizing servicers of student loans and that it believes servicers are engaged in practices that cause consumer harm. Servicers would be well advised to re-evaluate how robust their internal compliance controls are and consider what they would look like under the skeptical gaze of a regulator.