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Former Sallie Mae Unit Up For Lucrative Education Department Contract

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The U.S. Department of Education is seriously considering granting a potentially billion-dollar, decade-long contract to a former unit of Sallie Mae, the student loan company the Justice Department last month accused of cheating U.S. soldiers.

In a previously unreported move, the department said May 30 that Navient Corp., the nation’s largest student loan company, was one of four finalists for a new contract to run its system for originating and disbursing new federal student loans and grants and keeping track of existing ones. The current contract, held by Accenture LLP, was valued at $880 million as of May 19, according to the Education Department.

If Navient wins the contract, it would have a role in originating new federal loans for borrowers, keeping track of their debts, collecting monthly payments on their loans, and chasing them if they default. In other words, a borrower's entire interaction with the Education Department -- from the moment she takes out a loan to the day she pays it off -- could solely be through Navient.

The May 30 announcement, made in federal contracting documents, follows a May 13 settlement between Navient, the Justice Department and the Federal Deposit Insurance Corp., a federal bank regulator. In the settlement, government authorities accused Navient and SLM Corp., or Sallie Mae, of intentionally overcharging troops on their federal student loans and willfully obtaining default judgments against service members over an eight-year period, in violation of the Servicemembers Civil Relief Act. The FDIC alleged the companies illegally told troops they had to be deployed to receive entitled benefits and improperly required them to meet other tests. It's possible that up to 60,000 troops were harmed, authorities said.

Neither company admitted or denied wrongdoing, though Navient’s chief executive, John Remondi, apologized in a statement for “processing errors.” Navient spun off from Sallie Mae on May 1, taking the company’s loan servicing and collections business. Sallie Mae is now a bank.

Navient’s selection as a finalist for the lucrative loan origination contract follows a series of moves by the Education Department that raise doubts about its commitment to police the company and its other contractors amid mounting evidence suggesting wrongdoing. The selection also highlights Navient’s close relationship with the department, for which it collects payments on loans and chases borrowers who default. Navient also sometimes coordinates with the department when responding to congressional inquiries.

At the time of the May 13 settlement, Education Secretary Arne Duncan vowed to hold Navient accountable, and replied that “every option is on the table” when asked whether the company would keep its other well-paying Education Department contract to interact with borrowers and collect their payments on federal student loans. The company has four servicing contracts valued at a combined $126 million, department records show.

Last week, in a discussion about Sallie Mae during a Senate Banking Committee hearing, Sen Sen. Jack Reed (D-R.I.) said he would urge Defense Secretary Chuck Hagel to consider placing companies that mistreat service members on a sort of “off-limits” list that would act as a warning to troops to avoid doing business with those companies.

Duncan directed the Office of Federal Student Aid, the department unit that’s supposed to supervise Navient, to further investigate after the May 13 settlement -- a move that industry executives took as a signal that Duncan wasn’t satisfied with the Justice Department’s findings.

According to congressional aides, the department has told Capitol Hill that its review of Navient should take about four months. Depending on what Federal Student Aid discovers, it may examine other loan servicers as well. The findings are expected in mid-September -- about a month after the department typically determines how many new loans each of its four main servicers will receive for the upcoming academic year.

Student advocates and consumer groups said Navient’s selection as a finalist for the new contract calls into question Federal Student Aid’s investigation into the company.

Deanne Loonin, director of the National Consumer Law Center's Student Loan Borrower Assistance Project, is among experts who have previously criticized FSA oversight as inadequate. She said the pending FSA investigation is “too little, too late.”

“It’s incomprehensible that the Education Department keeps Navient in the running after finding all these problems at the company,” Loonin said. “It’s an indication that they don’t seem to be taking these violations seriously.”

Chris Hicks, an organizer who leads the Debt-Free Future campaign for Jobs With Justice, a Washington-based nonprofit that is among organizations that have called on Duncan to suspend the department’s current loan servicing contract with Sallie Mae, said the government's decision to keep working with the companies suggests it isn't serious about holding them accountable.

“The Department of Education’s actions show how tone deaf they are to what is going on around them,” Hicks said. “As tens of thousands servicemembers wait to be refunded money they were allegedly overcharged by Sallie Mae, the Education Department has been talking about rewarding Sallie Mae with an even larger contract that requires them to work with millions of more students.”

Sarah Lewis, senior lead researcher for policy at the AFL-CIO, the nation’s largest labor federation, said the department’s decision to select Navient as a finalist for the loan origination contract makes it clear the department views the company as “too big to fail.” The AFL-CIO has called on Duncan to terminate the company’s loan servicing contract.

“It’s really discouraging and upsetting,” Lewis added.

Patricia Christel, a Navient spokeswoman, declined to comment. Massie Ritsch and Dorie Nolt, Education Department representatives, did not return messages seeking comment about the origination contract.

In addition to the potential new business for Navient, Education Department officials have quietly told members of Congress and student advocates over the last few weeks that the department plans to renew Navient’s primary contract to collect payments on federal student loans, according to congressional aides and student advocates. The contract expires this month.

In explaining their rationale for renewing the contract, department officials have said they fear that borrowers would be inconvenienced if their loans were transferred from Navient to another company. James Runcie, the student aid unit’s chief operating officer, told the Senate in March that borrowers could face “dislocation” if their loans were transferred.

Runcie also said then that his agency hadn’t found a “wholesale” violation by Sallie Mae of its contract, which is now held by Navient, that would lead to termination. The Justice Department’s findings, the result of an investigation spanning more than a year, were announced two months later.

The Education Department’s contract with Sallie Mae, now held by Navient, requires it to be in compliance at all times with federal consumer protection statutes, such as the servicemembers law. Violating the servicemembers law constitutes a breach of the contract.

“Federal Student Aid is doing a thorough investigation, and the findings of that examination will inform our arrangement with Sallie Mae going forward,” Nolt said in an emailed statement about the planned contract renewal.

“If FSA were to decide to end Sallie Mae’s contract, some sort of extension would be necessary to smoothly transfer the millions of loans that the company handles to other servicers ... but the department effectively can cancel those contracts at any point,” Nolt said.

“They’re renewing the contract and then they’re doing the exhaustive review? It’s crazy,” Loonin said.

“When student loan servicers see that enforcement is inadequate or irregular or weak, it certainly does not drive them to do better things,” Sen. Sherrod Brown (D-Ohio) said last week. “That’s the case when it comes to the history of finance -- when regulators are not doing their job, abuses proliferate. If we don’t do enforcement right, abuses will grow.”

The department is renewing the contracts of all four of its main student loan servicers, but it's not clear what slice of the federal student loan pie each will get.

Michael Tarkan and Isaac Boltansky, analysts at Compass Point Research & Trading, a Washington-based financial firm, estimated in a May 28 report that Navient is on track to receive 25 percent of all new Education Department student loans allocated to the four select servicers. Last year, the company received 18 percent.

The department determines new loan allocations by examining the number of a servicer’s borrowers in default, as well as by surveying schools, borrowers and its own employees. Navient has the fewest share of borrowers in default, Education Department data show. The company has consistently ranked ahead of its three major competitors when it comes to the share of borrowers in default.

Over the last three years, the allocation figures have been made public in mid-August. This year’s numbers could come before the FSA completes its investigation of Navient.

“That makes me very uncomfortable,” said Lewis of the AFL-CIO. “I am very interested to see what extent of new loans will be allocated to Navient. It’s a big question.”

Some Obama administration officials are spooked by the involvement of the prominent labor group, which enjoys close ties with the White House, according to advocates for student borrowers in touch with White House officials and the Education Department. The officials are worried that ongoing criticism of Duncan and his department could risk hurting Democrats in the upcoming November elections, advocates said.

Matt Lehrich, a White House spokesman, said, “We're not going to participate in your ongoing attempt to slander Arne [Duncan]. Thanks for reaching out.”

Duncan is one of President Barack Obama’s longest-serving Cabinet secretaries.

Student groups and labor leaders such as American Federation of Teachers President Randi Weingarten are concerned that Duncan will ignore their pleas to hold Navient accountable for its alleged wrongdoing.

The department told Navient in a confidential letter in October that it intended to renew its main servicing contract for 2015 -- despite being told weeks earlier that federal investigators discovered evidence the company, then part of Sallie Mae, cheated troops on their federal student loans, according to officials familiar with the investigation.

The Huffington Post previously reported that federal officials knew about the evidence, without specifying whether Education Department officials knew as well.

In December, the department told Sen. Elizabeth Warren (D-Mass.) that it had declined to levy any fines against the company even though it had secretly determined that Sallie Mae over the previous 10 years had harmed borrowers, incorrectly billed the department and experienced other servicing failures. The department dismissed the various findings as “compliance issues” in its letter.

In March, the department worked with Sallie Mae to provide some answers to a detailed list of questions Warren had about the quality of the company’s servicing of federal student loans, Chris Greene, an Education Department spokesman noted. Sallie Mae answered some of Warren’s questions. The only data it provided with the Education Department’s blessing -- the share of borrowers with federal Direct loans postponing their payments through the use of forbearance and the share repaying their debts using income-linked repayment plans -- both scored well above the national average.

“There’s no real oversight there,” Brown said of the Education Department’s policing of federal student loan servicers. “There’s always a one-step-ahead-of-the-sheriff phenomenon.”

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