POLITICS
09/12/2014 04:10 pm ET Updated Sep 12, 2014

Education Department Sends More Student Borrowers To Firm Just Penalized By DOJ

Tom Williams via Getty Images

The Education Department has rewarded a former Sallie Mae unit with more taxpayer-provided business even after the loan servicer, now known as Navient Corp., was accused by federal prosecutors in May of intentionally cheating troops on their federal student loans.

The official announcement late Thursday, of a decision previously reported by The Huffington Post, also comes despite the Education Department's own pending probe into evidence amassed by the Justice Department that Sallie Mae and Navient overcharged some 60,000 troops by tens of millions of dollars. The results of that probe likely will be made public this month, the Education Department has said.

The two companies settled the federal prosecutors' allegations without admitting or denying wrongdoing. Education Secretary Arne Duncan said in May that his department would further investigate their conduct with "no presumption of guilt or innocence." Navient was spun out from Sallie Mae earlier this year.

The Education Department, which annually pays loan servicing companies hundreds of millions of dollars to interact with borrowers and collect their monthly payments, said late Thursday that Navient had improved its standing relative to the department's three other major loan servicers. An analyst who follows Navient on behalf of investors said the department will likely place about 30 percent more loans with the company than it did last year.

"It sends a clear message to borrowers: If you misstep, there are consequences. If your servicer missteps, they're let off the hook and rewarded," said Chris Hicks, who leads the Debt-Free Future campaign for the Washington-based nonprofit Jobs With Justice. "For Navient, the message is clear: You're taken care of. We will not discipline you."

According to the Education Department's data, Navient finished in third place among the current major loan servicers, based on default statistics and customer satisfaction surveys, and won the right to collect payments on the new loans that will be held by 24 percent of college students taking out federal debt this academic year. The company had the lowest share of borrowers in default. It also had a higher-than-average share of borrowers enrolled in repayment plans that cap monthly payments based on borrowers' earnings.

"On behalf of customers and taxpayers alike, we’re proud of our consistent track record of helping more student loan borrowers succeed,” Jack Remondi, Navient's chief executive, said in a statement.

Navient had finished last in each of the previous two years.

This year's ranking should translate into more than 700,000 new borrowers for the company, according to Michael Tarkan, an analyst at the Washington financial firm Compass Point Research & Trading. That represents a roughly 30 percent increase from last year, when Navient's then-parent, Sallie Mae, won the right to collect payments from 558,000 new borrowers. The company currently services loans on the Education Department's behalf for a total of 5.8 million borrowers.

The department's latest move, announced on an obscure government website, is likely to provoke criticism from some congressional Democrats, organized labor, student groups and borrower advocates. Representatives from each of those four groups had previously called on the department to either suspend Navient's ability to receive new taxpayer-provided business, terminate its contract or launch a comprehensive investigation into claims the company harms borrowers.

"There is little to no oversight by the Education Department, and when problems are found they're not being addressed," Hicks said.

Regarding its handling of federal student loans for the troops, Navient claims that it only followed the Education Department's directions.

"The eligibility for the [servicemember] benefit was set forth by Congress with confirming guidance from the Department of Education, which Navient followed," Patricia Christel, a Navient spokeswoman, said in an emailed statement. "The company settled to put this matter behind us while noting there was no determination of a violation of law or rule. Navient did not, nor has it ever, deliberately taken advantage of its military customers and has always worked to ensure they receive the benefits they deserve."

In May, Attorney General Eric Holder, with Education Secretary Arne Duncan by his side, announced the Justice Department's settlement with Navient and Sallie Mae. Holder said the practice of preventing troops from reducing the interest rates on their federal and private student loans in violation of the Servicemembers Civil Relief Act "appears to have been the rule, rather than the exception," at the companies. The alleged overcharging of borrowers began in 2005, according to the Justice Department, and it "was intentional, willful, and taken in disregard for the rights of servicemembers.”

Duncan called the allegations "troubling."

Navient has previously said it was penalized for not complying with what the company described as new interpretations of existing law. Remondi, the company's chief executive, said in May, “We offer our sincere apologies to the servicemen and servicewomen who were affected by our processing errors and thus did not receive the full benefits they deserve."

Dorie Nolt, an Education Department spokeswoman, and Education Under Secretary Ted Mitchell, who oversees the Office of Federal Student Aid, did not respond to messages seeking comment. FSA is responsible for the federal student loan system.

In addition to the new borrowers already awarded, Navient is also a finalist for a separate Education Department contract that could be worth up to $1 billion over the next decade. It was selected as a finalist for the lucrative contract two weeks after its settlement with the Justice Department.

President Barack Obama, who has presided over a near doubling of unpaid federal student debt, directed the Education Department in June to rework its loan servicing contracts with companies such as Navient after months of criticism regarding their lackluster customer service and inability to stem the rising tide of loan defaults. Even the Treasury Department has publicly challenged the Education Department and its contractors over how they handle borrowers struggling with student debt.

Last month, the department announced it had renegotiated its contracts. On Wednesday, William Leith, chief business officer at FSA, testified before a Senate committee that the department would end up paying its loan servicers "a little bit more" money as a result -- even if their performance doesn't improve.

Sen. Elizabeth Warren (D-Mass.), who has heavily criticized the Education Department's oversight of Navient and Sallie Mae, was not pleased.

"Let me get this straight: You break the law. You don't follow the rules. You treat the borrowers badly," Warren said of the loan servicers. "And you all just renegotiated the contracts to make sure that across the portfolio [loan servicers] are going to make a little more money if nothing changes?"

The new contracts specify that companies such as Navient will receive more money if they keep borrowers current on their loans and less if the borrowers fall behind or postpone payments. The goal, according to the Education Department, is to incentivize servicers to keep borrowers in good standing.

Separately, beginning next year, the Education Department will allocate a quarter of new borrowers' loans to smaller, not-for-profit loan servicers. The move will result in less business for the four companies that have traditionally dominated federal student loan services: Navient, Nelnet Inc., Great Lakes Higher Education Corp. & Affiliates, and Pennsylvania Higher Education Assistance Agency.

Tarkan, the Compass Point analyst, estimates that while Navient will receive more fees per borrower, the company is likely to be granted fewer loans in future years. He expects a "relatively muted" impact on the company's earnings.

HuffPost

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