Debt Trap: How the student loan industry fails young Americans

Omar Andrews figured he was about to watch history being made in his home state of Maine. Local lawmakers, seeking to do something about the nation’s growing student loans crisis, wanted to crack down on the powerful loan servicing companies. Amid mounting complaints from borrowers that the companies failed to live up to the terms of their contracts and were illegally harassing consumers, state officials proposed new licenses with the message: comply with our standards or cease operation in Maine.

The move would put Maine in the company of a handful of proactive states looking to protect borrowers in the face of the nation’s ballooning student debt—defaults on federal loans rose 14% last year alone. Andrews, a 31-year-old U.S. Marine veteran struggling to repay his own student debt, was one of the bill’s most vocal student advocates.

He’d racked up $20,000 in student loans before dropping out of college to join the military. While Andrews was on deployment abroad, he was able to start paying back his loans thanks to a platoon sergeant who helped get him in touch with the right services at the Pentagon. But he knew he was one of the lucky ones.

“If I didn’t have that handholding, I probably wouldn’t have even paid a dime yet,” Andrews said.

Many of Andrews’ fellow veterans didn’t get that mentoring and didn’t fare as well. At the University of Southern Maine, where Andrews is now enrolled, he started a veterans group and heard from his classmates about how loan servicing companies with billion-dollar federal contracts had been overcharging them. As far as he could tell, the Department of Education was unwilling to take bold action to protect them. And it wasn’t just veterans who were struggling. First-generation college students and students of color like Andrews have been disproportionately hit by the growing debt.

“Essentially the federal government is just: ‘Hear no evil, say no evil’ on the whole situation,” he told Fusion. “So it’s really on the states to protect its citizens from being scavenged by these companies.”

Andrews decided to take action. He testified before lawmakers and wrote op-eds about why state oversight mattered. The bill quickly moved through public Senate committee hearings and hit the Maine Senate floor. Then it stopped. Lobbyists hired by Navientthe largest student loan servicing company in the nationswooped into the State Capitol They pressed lawmakers to push the bill back to the 2018 session, arguing the states should allow the fledgling Trump administration to take action rather than institute a patchwork of laws.

The result marked a swift small-town victory for the student loan behemoth. Only weeks before, Navient had registered in the state, and spending a paltry $8,440 lobbying over a few months, the company had gotten what it wanted.

What Andrews witnessed was just a glimpse of the power of the nation’s student loan servicing industry, power that has bloomed as student debt has grown to $1.4 trillion in the last decade—making it the largest source of American consumer debt.

During a yearlong investigation into the crisis, Fusion TV’s The Naked Truth: Debt Trap untangled how Navient has positioned itself to dominate the lucrative student loan industry, flexing its muscles in both Washington and increasingly across the states. The story of Navient’s emerging power is also the story how an industry built to help dissolve inequities is increasingly reinforcing them.

Omar Andrews and student loan policy counsel Whitney Barkley-Denney make their case for more state oversight of student loan servicers.

Omar Andrews and student loan policy counsel Whitney Barkley-Denney make their case for more state oversight of student loan servicers.

A HAND IN EVERY CORNER OF THE SYSTEM

The majority of the student loan debt that Americans owe is lent to borrowers by the federal government, meaning that taxpayers are on the hook for more than $1 trillion in outstanding loans. For years, much of this money was managed by private banks and loan companies like Sallie Mae. Then in 2010, Congress cut out the middlemen and their lending fees, contracting only with loan servicers to get the money back.

Following that shift, in 2014, Sallie Mae spun off its servicing arm into the publicly traded company Navient. Led by former Sallie Mae executives, Navient describes itself as “a leading provider of asset management and business processing solutions for education, healthcare, and government clients.” But it is best known for being among a handful of companies that have won coveted federal contracts to make sure students repay their loans. And in pursuit of getting that money back, critics say the Department of Education has allowed these companies to all but run free at the expense of borrowers.

“The problem is that these servicers are too big to fail,” said Persis Yu, director of the National Consumer Law Center student loan borrower assistance project. “We have no place to put the millions of borrowers whom they are servicing, even if they are not doing the servicing job that we want them to do.”

As a giant of the industry, Navient services 29% of federal student loans, and 29% of private loans, more total loans than any other company. It flourished as student loan debt exploded under the Obama Administration, and its stock rose sharply after the election of Donald Trump. Navient now services over 12 million borrowers, handling $300 billion in student loan debt. Add to that, Navient has subsidiary companies like Pioneer Credit Recovery that handle debt collections of loans that go into default.

But Navient doesn’t just service federal loans, it has a hand in nearly every aspect of the student loan system. It has bought up private student loans, both servicing them and earning interest off of them. And it has purchased billions of dollars worth of the older taxpayer-backed loans, previously held by banks like JP Morgan, earning interest, as well as servicing that debt.

Just like banks have done with mortgages, Navient packages many of the private and pre-2010 federal loans and sells them on Wall Street as asset-backed securities. And although it is barred from making loans till 2019 under the terms of its separation from Sallie Mae, Navient watchers expect it could eventually issue new private loans itself. Meanwhile, it’s in the running to oversee the Department of Education’s entire student debt web portal, which would open even more avenues for the company to profit from—and expand its influence over—Americans’ access to higher education.

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PUBLIC GOOD OR FINANCIAL PRODUCT

Most Americans see education as a public good, but how we view student debt, often essential to accessing that public good, is more complicated.

“What type of product is a student loan product?” questioned Persis Yu. “Is it a purely consumer financial product, like a credit card, like a car payment, or is [it] purely financial aid?”

Yu says the fundamental tension between those two ideas has led to generous loan programs for borrowers on the one hand, and draconian responses when they are unable to keep pace with payments on the other. The tension can be seen in the myriad of complaints against Navient. From January 2014 to December 2016, Navient was named as a defendant in a federal lawsuit 530 times. The vast majority were aimed at the company’s student loans servicing operations. Nelnet and Great Lakes, the two other biggest companies in the student loans market, were sued 32 and 14 times over the same period, respectively. According to a Fusion analysis of CFPB and individual company data, Navient has more complaints per borrower than any other servicer. Navient, however, says most of these complaints focus on loan terms, not servicing.

Many of these complaints relate to the company’s standard practice of auto-dialing borrowers to solicit payments. Shelby Hubbard says she has long been on the receiving end of these calls as she has struggled to pay down her debt. Hubbard racked up over $60,000 in public and private student loans by the time she graduated from Eastern Kentucky University with a basic health care-related degree. “It consumes my every day. It’s a constant burden,” Hubbard said of the constant calls. “Every day, every hour, starting at 8:00 in the morning.”

Students who take out higher loans to graduate from top schools are not the ones who tend to fall behind. The most at-risk students are, like Hubbard, those who go to less prestigious schools, often have fewer resources, and a smaller margin of error when financial emergencies arise. They frequently take longer to graduate, further amplifying their debt, if they graduate at all. A recent report by the federal government’s consumer watchdog agency found that while many borrowers are taking longer to pay down their debt, those with debt of less than $20,000 are the most likely to fall behind. Black borrowers also fare worse here. Studies have found that the disparity between black and white students with debt triples after graduation, and Zip codes more often shared by black and Latino students see higher delinquency rates.

These days, Hubbard, 26, works in Ohio as a logistics coordinator for traveling nurses. She’s made some loan payments, but her take-home pay is about $850 every two weeks. With her monthly student loan bill at about $700, about half her income would go to paying the loans back, forcing her to lean on her fiancé for financial support.

“He pays for all of our utilities, all of our bills. Because at the end of the day, I don’t have anything else to give him,” she said. The shadow of her debt hangs over any discussion the couple has about the future: mortgage payments, having children, planning for emergencies.

Hubbard has gotten into an income-based repayment plan for her federal loans, but she doesn’t have that option with the private ones and recently stopped paying them as the money was mostly going toward interest and late fees, barely making a dent in her total debt. Unlike with mortgages or most other consumer debt, borrowers can’t wipe out student loan debt even through bankruptcy.

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SEEKING ACCOUNTABILITY

In its last years, the Obama Administration tried to reign in the student loan industry and promoted more options for reduced repayment plans for federal loans.

But former Secretary of Education John B. King told Fusion, “We ran out of time” to fix more of the issues with servicing. Since then, President Trump’s Education Secretary Betsy DeVos has reversed or put on hold changes King’s office proposed and appears bent on further loosening the reins on the industry, while leaving individual students little recourse for bad service.

In late August, DeVos’s office announced that it would stop sharing information about student loan servicer oversight with the federal consumer watchdog agency known as the Consumer Financial Protection Bureau, or CFPB.

Earlier this year, as complaints grew, the CFPB sued Navient for allegedly misleading borrowers about the repayment options that they are legally obligated to provide.

“Navient has failed to perform its core duties in the servicing of student loans, violating Federal consumer financial laws as well as the trust that borrowers placed in the company,” according to the bureau’s complaint.

A main allegation is that Navient, rather than offering income-based repayment plans, pushed some people into a temporary payment freeze called forbearance. Getting placed into forbearance is a good Band-Aid but can be a terrible longer-term plan. When an account gets placed in forbearance, its interest keeps accumulating, and that interest can be added to the principal, meaning the loans only grow.

Lynn Sabulski, who worked in Navient’s Wilkes Barre, Penn. call center for five months starting in 2012, said she experienced firsthand the pressure to drive borrowers into forbearance.

“Performing well meant keeping calls to seven minutes or under,” said Sabulski. “If you only have seven minutes, the easiest options to put a borrower in, first and foremost, is a forbearance.”

Sabulski said customer service representatives were trained to offer forbearance first, and that the call policy didn’t leave enough time to discuss other options. If she didn’t hit her mark, “I could be written up. I could lose my job,” she added.

Navient denies the allegations, and spokeswoman Patricia Christel said in an email that the 7 1/2 minutes was the average call time, not a target. Christel also said Navient’s call center representatives are rated on a variety of factorsthe largest being “caller satisfaction and customer experience.”

But in a March 24 motion it filed in federal court for the CFPB’s lawsuit, the company also said that “there is no expectation that the servicer will act in the interest of the consumer.” Rather, it argued, it had to look out for the interest of the federal government and taxpayers.

Navient does get more per account when the servicer is up to date on payments, but getting borrowers into a repayment plan also has a cost because of the time required from customer service representatives.

“[With] forbearance they still get to tell the federal government that they’re servicing the loans without having to do any work or make any calls to service them,” said Charlie Eaton, a Postdoctoral Scholar at Stanford University who has studied higher education finance.

The same day the Financial Protection Bureau filed its lawsuit, Illinois and Washington filed suits in state courts. Attorneys general offices in nine other states confirmed to Fusion that they have ongoing investigations into the company.

“Any time you have billions of dollars at issue in play, the potential is there for bad actors to exploit that, to take advantage of consumers,” Washington Attorney General Bob Ferguson told Fusion. “These guys weren’t playing by the rules. Frankly, that pisses me off, and so we filed a lawsuit,” he said.

At a recent hearing in the Washington case, the company shot back: “The State’s claim is not, you didn’t help at all, which is what you said you would do. It’s that, you could’ve helped them more.”

Investors are also seeking more accountability. Fusion reviewed public records and found three separate lawsuits that were combined last year into one class-action case accusing Navient of using fraudulent accounting practices to mislead those buying its student loan-backed securities. Another firm has begun looking into similar allegations. Navient stock shareholders have asked the Securities and Exchange Commission to force the company to be more transparent about how it services loans but were denied on the basis that it is part of Navient’s “ordinary business operations.”

Navient disputes the shareholder allegations, insisting it “is a leader in enrolling eligible borrowers into income-driven repayment programs.” The company also insists it has forcefully advocated in Washington to streamline the federal loan system and make the repayment process easier to navigate for borrowers.

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THE HIDDEN DATA

None of these complaints address one of the most significant and least understood ramifications of the student loan industry’s consolidated powerthe unprecedented amount of data that the company has compiled on students. Researchers for years have been clamoring to access the kind of student data that Navient owns, and have struggled to piece together different databases in its absence.

The lack of more granular-level information makes more nuanced policy making and accountability a challenge for researchers and advocates. Namely, there are no specific answers about who makes up the 10% of borrowers defaulting, which schools they attended, when in the process are they defaulting, and most important of all: why.

“It’s the most obvious thing in the world and we don’t have that,” said Amy Laitinen, director for higher education at New America, a nonpartisan think tank that focuses on using data to solve problems.

Navient spokeswoman Christel said it’s up to the federal government to decide what part of its student loan data to share. Its decision: not much. In 2008, Congress made it illegal for the Department of Education to make the data public, arguing that it was a risk for student privacy. Private colleges and universities lobbied in favor of keeping the data from the public. So too did Navient’s predecessor Sallie Mae. The result is that today servicing companies like Navient have compiled their own private mountains of data about graduations, debt and financial outcomes—which they consider proprietary information. A recent bipartisan bill to reverse this policy is stuck in committee.

The lack of school-specific data about student outcomes can be life-altering. Nathan Hornes, a 27-year-old Missouri native, was looking around for schools until a notorious one caught his eye while watching TV. “You get those Everest commercials,” Nathan said. “And I kept seeing them, and kept seeing them. And I was like, I should just give them a call.”

At Everest, some teachers would walk students to a Dave & Busters for the whole period, and tests sometimes consisted of playing board games, he said. When he tried to transfer out, he was told none of his credits would transfer.

Everest College, it turned out, was a for-profit school that lacked national accreditation and had a horrible track record of students not being able to find work after graduation. While Hornes thought he was getting grants to go to school, in reality he says he unknowingly gave the school the right to take out loans in his name. By the time he graduated, he had racked up over $70,000 in student loan debt. For a time, Navient was getting paid to service the loans he took out for a bogus school.

“Navient hasn’t done a thing to help me,” Hornes said. “They just want their money. And they want it now.”

Both the federal government and Navient had data about student outcomes at Everest College that, if publicized earlier, could have made it both harder for the federal government to justify loans to Everest students and made Hornes think twice about choosing the college in the first place. Hornes’ loans were recently forgiven following state investigations into Everest’s parent company Corinthian. But many other borrowers still await relief.

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THE CONFLICT OF INTEREST?

At the base of Navient’s place in the student loan servicing system is a tug-of-war of goals and incentives. As a servicer of federally-backed loans, it has the incentive to keep borrowers up to date with their accounts so its contract stays in good standing. Yet it earns interest on the old federally-backed loans when borrowers take longer to pay or go into forbearance before a reduced income-based repayment plan. As an owner of private loans, it also earns money if people fall behind and the interest accrues. Meanwhile, the company’s separate default debt collection arm can pocket up to 16% of defaulted debts through collection fees. Obama’s White House restricted that collector’s fee arrangement when the practice made headlines, but the Trump administration has reinstated it.

And, unlike with credit card companies, borrowers don’t have the option to switch servicers. Those with federal loans are assigned by the Department of Education through a complicated point system and then essentially stuck with their lot.

In fact, the ways the company makes money off of student debt are so convoluted that even the federal government can find it hard to track. A spokesperson for the Department of Education seemed confused when asked by Fusion to explain whether Navient earns interest off the federally-backed loans it owns. Navient says it does, even as a department spokesman insisted it doesn’t.

FLEXING MUSCLE IN WASHINGTON AND BEYOND

In recent years, Navient, and the broader industry, have stepped up efforts to influence decision makers. Since 2014, Navient executives have given nearly $75,000 to the company’s political action committee, which has pumped money into mostly Republican campaigns, but also with a few Democrats. During the same time, the company has spent more than $10.1 million lobbying Congress, with $4.2 million of that spending just since 2016.

It’s not always clear what policies or issues Navient is lobbying for, given how vague federal lobbying reports have become. But despite Navient’s expansion into new markets like infrastructure and health care loan servicing, much of its lobbying is still related to student loan regulations, including the 2010 Dodd-Frank Act, passed after the 2008 mortgage crisis to better regulate Wall Street and financial transactions, and the CFPB, which Trump and many congressional Republicans are looking to significantly curtail. Navient has spent $400,000 on issues directly relating to the CFPB since 2014, with at least $80,000 specifically in response to the watchdog agency’s complaint.

Fusion found 22 former federal employees who have lobbied for the company since 2014, including three former members of Congress. A revolving door is increasingly common in Washington, but a couple of Navient lobbyists’ backgrounds are telling.

Denny Rehberg, who lobbies for Navient on behalf of the firm Mercury LLC, served as Republican U.S. Rep. from Montana from 2000 to 2012. While in office, he called federal aid for students “the welfare of the 21st century.” Rehberg added: “You can go to school, collect your Pell Grants, get food stamps, low-income energy assistance, section 8 housing, and all of a sudden we find ourselves subsidizing people that don’t have to graduate from college.”

Vin Weber, also a Navient lobbyist at Mercury LLC, was a Republican U.S. representative from Minnesota during the ’80s and early ’90s. He is on the board of ITT Tech, one of the largest for-profit colleges in the nation. The school shuttered all its campuses in 2016 after the Obama Department of Education accused it of predatory recruitment and lending, among other concerns. Weber is also on the board of the American Action Network, a group that aired attack ads against the CFPB and its creator, Sen. Elizabeth Warren, in 2015. Former Republican New York Rep. Tom Reynolds, who lobbies for Navient on behalf of the firm Nixon Peabody, is also on the board of American Action Network.

In state legislatures, like Maine, critics complain that hired Navient lobbyists skip the public comment period, showing up after other stakeholders have given their statements and cleared out.

“They came late to the party,” said State Sen. Eloise Vitelli, who sponsored the oversight bill introduced in Maine. “All of our bills have public hearings, and they certainly could have been one of the people or entities to testify in the hearings, but they didn’t.”

The lobbyists argued that the states should wait for the new Department of Education to make its move, said Sen. Vitelli. “My counter to that is that it was precisely because of the uncertainty at the federal level that states need to step in and put something in place to protect our consumers, our borrowers.”

California, Connecticut, Massachusetts and the District of Columbia have all recently approved laws that seek to regulate the industry, and many others are considering them. And in states that have proposed new regulations on the student loans industry, Fusion found a sharp increase in spending over the last few years: Navient has spent at least two-thirds of its $300,000 in state lobbying since 2016.

Earlier this year, Illinois State Sen. Daniel Biss introduced a bill similar to Maine’s to regulate the loan servicing industry. And just like in Maine, the legislature was suddenly swarmed by lobbyists, this time from the Student Loan Servicing Alliance, a trade group that represents Navient, among other servicers. In the end, the bill narrowly passed through Senate and the House, but Republican Gov. Bruce Rauner vetoed the bill in late August after the trade group lobbied his office, records show. He stressed that the bill “encroaches on the federal government’s responsibilities.”

That same argument is being pushed by student loan servicer trade groups, including the National Council of Higher Education Resources, which asked the Department of Education in July to stave off efforts to regulate the industry at the state level.

The loan crisis, of course, goes beyond the power of the loan servicers. Behind the rise in debt is the soaring cost of higher education. Deep cuts to education budgets made during the recession were never replaced. “That means somebody’s got to make up the difference, and it all falls on students,” Warren told Fusion.

Better educating teens about financial literacy before they apply to college will help reduce their dependence on student loans, but that doesn’t change how the deck is stacked for those who need them. A few states have made community colleges free, reducing the need for student loan servicers.

Andrews says he’s not about to give up on a local solution. Recently, he met with Gov. Paul LePage, a Republican who is pushing a separate student loans bill of his own.

Maybe next session, with a little bit of work, they can pull together the support they need to put the bills on LePage’s desk,” he said. “If we’re going to move forward on these things we’re going to need support from both sides of the aisle.”

But until the Department of Education takes a tougher stance, states like Maine can fix only so much.

“Navient’s view is, hey, I’m just going to take this money from the Department of Education and maximize Navient’s profits, rather than serving the students,” Warren told Fusion. “I hold Navient responsible for that. But I also hold [the] Department of Education responsible for that. They act as our agent, the agent of the US taxpayers, the agent of the people of the United States. And they should demand that.”

Production Associate Laura Juncadella contributed to this story.

The Naked Truth: Debt Trap can be seen on Fusion TV. Find out where to watch here.

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