For years, Thomas Carter has been paying off a private student loan for schooling he never completed. Despite those payments, his balance has nearly tripled.
“We’re going on almost 20 years now,” Carter, 37, said of his payments. “The only loan that I know that lasts that long would be a mortgage loan. This is a mortgage loan for something I don’t even have.”
He borrowed roughly $5,500 from Sallie Mae in 2005 to attend a York, Pa., branch of the Art Institute, a now-defunct for-profit college. Carter left the Art Institute after just one semester. Now, decades later, he’s worried his experience with the loan from that period is about to get even worse.
That’s because Navient
NAVI,
— which, as the corporate descendent of Sallie Mae, owns the loan — is transferring servicing of it to MOHELA, a major student-loan servicer. The transfer is expected to impact 2.7 million borrowers.
Carter has about $57,000 in federal student debt, in addition to his private loans, that MOHELA is servicing. In November, the Education Department told him that $26,000 of that debt would be discharged because he was scammed by a different school he had previously attended. He has been contacting MOHELA for months asking for the servicer to process the discharge, he said, to no avail.
When Carter heard that Navient’s private student loans would be serviced by MOHELA, his first thought was, “Oh, no. Oh, no. No, this can’t be happening,” he said.
“If they can’t handle servicing federal loans, how are they going to handle servicing Navient’s private loans?” he said. Last year, the Education Department said it would withhold $2.7 million in payments to MOHELA over servicing issues. “It’s a very scary thought to me,” Carter said of the potential transfer.
But advocates say borrowers like Carter shouldn’t have to worry about these loans. That’s because the loans should be canceled, they say: The debt is part of a troubled portfolio made through deals with for-profit colleges that have been plagued by scandal, borrower advocates and lawsuits allege.
“I can’t believe how trapped and how impossible it’s been for people to get out of these loans that are so plainly the product of consumer fraud,” said Eileen Connor, the executive director of the Project on Predatory Student Lending, which represents students of for-profit colleges in litigation. By transferring servicing of the loans to MOHELA, Navient is “distancing itself” from the portfolio and “creating another layer” between the company and borrowers who are alleging the loans are invalid, she said.
Navient’s chief executive officer, David Yowan, said on a recent earnings call that the servicing transfer was a business decision that came after an in-depth review. The choice made financial sense because as Navient’s student-loan portfolio winds down, the company’s economies of scale in servicing disappear, making hiring a third-party company to service the loans more attractive.
The company said borrowers will remain on the same technology platform, and many of Navient’s employees will be moving to MOHELA.
MOHELA echoed Navient’s assertion that the transition would be “seamless” for borrowers. The organization said that its operation for servicing private student loans is “separate and distinct” from its business servicing federal student loans like Carter’s debt that is currently being serviced by MOHELA.
“As one of the largest student-loan servicers in America with over 40 years of experience, MOHELA’s priority remains steadfast to provide excellent customer service for all borrowers,” the company said.
A portfolio dogged by controversy
Navient is perhaps best known as a major servicer of federal student loans. But the company got out of that business in 2021 following years of scrutiny from lawmakers and borrower advocates.
The company still holds loans backed by the federal government and private student loans. Navient’s private-student-loan portfolio, which was part of the MOHELA transaction, has been the target of litigation, including from state attorneys general. These suits have alleged that Sallie Mae, Navient’s corporate predecessor, made the loans knowing that borrowers would struggle to repay them.
The loans were often part of deals with schools with low graduation rates, including for-profit colleges, that were looking for a funding source they could offer students to fill the gap between the tuition they charged and the amount federal student loans would cover, court documents allege. In exchange for offering loans with a high risk of default to cover excess tuition, the schools would, in some cases, agree to take on some of the risk of default, the suits allege.
The schools and Sallie Mae largely made these deals in the early to mid-2000s, when most federal student loans were made by private lenders and backed by the federal government. The private loans with a high risk of default were typically part of a package deal Sallie Mae offered to the school that would give the company access to a large volume of loans guaranteed by the federal government, the suits allege.
In 2022, 39 attorneys general reached a settlement with Navient over the loans. As part of the deal, the company agreed to cancel $1.7 billion in private student debt. At the time of the agreement, Navient denied violating any laws. “The company’s decision to resolve these matters, which were based on unfounded claims, allows us to avoid the additional burden, expense, time and distraction to prevail in court,” Mark Heleen, Navient’s chief legal officer, said at the time.
But loans made to students in states outside of the agreement, as well as loans made to borrowers who were still paying on them, were excluded from the deal, Connor said.
“What’s remaining in their private-student-loan portfolio is really a compromised portfolio,” Connor said. Many borrowers have paid more than the original amount, face high interest rates or may have been in forbearance for years, she said.
“There’s no end to these loans — they could be decades old,” Connor added.
Owing on private debt, even with federal loans canceled
David Mayfield’s experience illustrates the challenges the loans have posed for some borrowers. Mayfield enrolled at ITT Technical Institute in 2005. He signed up for the school after representatives told him that his GI Bill would cover his tuition and that his ITT degree would help him land a job paying $55,000 a year, according to court documents. Those promises never came to fruition.
The school shut down in 2016 following allegations it had lured students into enrolling and taking on student loans by advertising inflated job-placement and graduation rates. The Education Department has canceled billions in federal student debt for students who attended ITT, including Mayfield. The agency approved his loans for discharge in 2022, according to court documents.
But Mayfield, who served in the Navy between 2001 and 2005, still owes nearly $26,000 on the Navient private student loans he borrowed to attend ITT. They have current interest rates of 18.25% and 14%, according to court documents. Mayfield originally borrowed $13,000. Navient has engaged in aggressive collection activity on the loans, a lawsuit alleges, including calling Mayfield multiple times a day.
Connor’s organization, the Project on Predatory Student Lending, is suing Navient on Mayfield’s behalf to try to get the debt discharged. It’s alleging that Navient is obligated to cancel the loan because of a federal law called the Holder Rule, which makes all current “holders” of an initial loan responsible for any fraudulent misrepresentations made in the selling of the product. Attorneys have also said it makes the current holder of the loan liable for any of the claims the student would have against the initial lender.
Navient declined to comment on Mayfield’s lawsuit, as it’s in active litigation.
“Navient is fully well aware of this issue around the validity of its subprime loans, especially where there’s been findings or borrower defense grants on the federal side,” Connor said, referring to the fact that the federal government has canceled loans from the same period.
“The idea that Navient is just sort of like, ‘We made a business decision that it’s in our interest to get out of the servicing business, but we still want somebody to collect these loans’ — it’s just gross. These loans should be canceled, not collected.”
Read the full article here
