Jack Remondi, the company’s chief executive officer, vowed a “smooth transition for borrowers and employees.”
But the announcement comes just a few months before student-loan payments and collections are set to resume in February and marks the fourth time a servicer has said they will exit their federal student-loan contract in the past year, complicating the daunting operational task before the Department of Education and student loan firms of turning the entire system back on for the first time.
“The transition to repayment seemed impossible,” even before Navient’s announcement, said Persis Yu, the director of the Student Loan Borrower Assistance Project at the National Consumer Law Center. “I don’t know realistically how the system prepares for all of these changes that are going to be happening simultaneously.”
Announcement comes after years of scrutiny
Navient’s decision to stop servicing government-owned student loans comes after years of critics pointing to student-loan servicers — and Navient specifically — as a source of the nation’s growing student-loan problem. Though the challenges borrowers face repaying their student loans have many causes, including rising tuition, consumer advocates and some lawmakers have said servicers like Navient exacerbated those challenges by throwing obstacles in the way of borrowers receiving relief they’re entitled to.
Navient has faced lawsuits from the Consumer Financial Protection Bureau and several state attorneys general accusing the company of steering borrowers towards unnecessarily costly repayment programs, among other allegations. Navient has called these claims “false and demonstrably so.”
To Seth Frotman, who was the student loan ombudsman at the CFPB when the bureau filed its suit against Navient, the fact that fewer borrowers will be exposed to Navient’s conduct thanks to the company’s exit is “good news.”
“It’s important to remember Navient’s dismal track record which is just littered with accounts of them ripping off borrowers,” said Frotman, who is now the executive director of the Student Borrower Protection Center, an advocacy group.
Still, he said, the company needs to be held accountable, even if they’re exiting their contract.
There is some indication that the Biden-era Department of Education will be taking a tough approach to student-loan companies. Richard Cordray, the chief operating officer of the Department’s Office of Federal Student Aid, said in a speech earlier this month, that officials made clear to servicers during recent contract negotiations that “performance and accountability metrics are key objectives,” for the agency.
That Navient and other servicers, “looked at this new reality in which laws are going to be enforced and borrowers are going to be protected, took their ball and went home shows you how bad it has been for the last years and decades,” Frotman said.
Servicers say economics of the contract has made the business difficult
Increased scrutiny of student-loan companies — including at the state level — combined with the challenging economics of student-loan servicing may explain in large part why so many servicers are exiting their contracts, said Scott Buchanan, the executive director of the Student Loan Servicing Alliance, a trade group.
He said the government “really needs to take a hard look” at whether “they’re paying enough to get the level of customer service that these borrowers deserve.” That combined with criticism over issues that he said are more related to the complicated laws surrounding the student-loan program than servicer conduct, creates “a really challenging environment,” for servicers.
Two-thirds of the large companies servicing student loans have exited the student-loan market, and that “speaks volumes” about “how incredibly broken it is,” Yu said. But she noted that unlike servicers, borrowers don’t have the option to leave it behind.
Concerns over Navient’s proposed replacement
Yu said she’s also troubled that Navient was able to essentially pick its own replacement. The company announced that it plans to transfer its servicing contract and much of the staff on Navient’s Department of Education servicing team to Maximus. Maximus already works with the Department of Education managing servicing for borrowers in default.
The company is currently facing a lawsuit from Yu’s organization alleging the company continued to seize the wages and tax refunds of scammed students who had submitted applications to have their federal debt discharged. Maximus did not immediately respond to a request for comment on the suit.
Given the size of Navient’s portfolio — as of March 2021 it serviced billions of dollars worth of loans for 6 million borrowers — and the tumult in the student-loan system, there are likely few options available to take over the company’s contract.
“Our student loan system is too big to fail,” Yu said. “What option does FSA have but to agree?”
The proposed agreement between Navient and Maximus is subject to approval by the Office of Federal Student Aid. In a statement, Cordray said the office has been monitoring the negotiations between Navient and Maximus for “some time.”
“FSA is reviewing documents and other information from Navient and Maximus to ensure that the proposal meets all legal requirements and properly protects borrowers and taxpayers,” Cordray said in the statement. “We remain committed to making sure that our federal student-loan servicing agreements provide more accountability, meaningful performance measures, and better service for borrowers.”
To advocates like Yu, the exit of servicers and the precarious position of borrowers in these shake ups is a sign that it’s time for a fresh start for the student-loan system.
“This really points to why we need to cull the student-loan portfolio, we need widespread debt cancellation,” Yu said.