As part of the settlement, loan servicer Navient agreed to pay the states $95 million to provide a refund to affected borrowers, or about $260 each for 350,000 borrowers.

Kris Tripplaar/Sipa USA via Reuters

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Kris Tripplaar/Sipa USA via Reuters

As part of the settlement, loan servicer Navient agreed to pay the states $95 million to provide a refund to affected borrowers, or about $260 each for 350,000 borrowers.

Kris Tripplaar/Sipa USA via Reuters

Loan-service giant Navient has agreed to forgive $1.7 billion in student loan debt owed by about 66,000 borrowers, as part of a settlement announced Thursday with 39 state attorneys general.

The settlement ends a years-long legal battle with states in which Navient faced two serious allegations. First, the company has been accused of steering student borrowers toward costly forbearances instead of more flexible, income-driven repayment plans.

The reason for this steering, says Persis Yu, counsel at the Student Borrower Protection Center, is that enrolling a borrower in an income-driven repayment plan requires considerable effort on the part of a loan officer. .

“There’s paperwork that has to come and go. It’s just more work for the servicer. It’s very easy for the servicer to put a borrower into forbearance, and it’s been proven that center employees calls were incentivized to make those calls as fast as they could,” Yu says. “And that meant getting people to quick and easy options — not necessarily the best option for the borrower.”

A 2019 audit by the U.S. Department of Education’s Office of Inspector General corroborated this allegation, finding that Navient’s telephone counselors repeatedly recommended forbearance to borrowers without mentioning other more repayment options. flexible.

As part of the settlement, Navient agreed to pay $95 million for the states to provide a refund to affected borrowers, or about $260 each for 350,000 borrowers.

The company has also faced allegations that its predecessor, Sallie Mae, provided subprime private loans to vulnerable borrowers it knew were likely to default.

The states alleged that these private loans were made in cooperation with certain for-profit colleges, many of which had incredibly low graduation rates, to induce those schools to rely on the company for other student loans as well.

In order to qualify for the federal government’s student loan program – a vital lifeline for colleges and universities – schools must demonstrate that at least some of their income comes from other sources, including student loans. private loans,” says Eileen Connor, director of the Predatory Student Loans project.

Connor says Sallie Mae would make risky, high-interest private loans to some of a school’s borrowers, with the understanding that the school would then recommend students use Sallie Mae for their federal student loans. In many cases, schools have also promised to reimburse Sallie Mae if students default.

“Even though they may have suffered a small loss” on those risky private loans, Connor says, “it was worth the [Sallie Mae/Navient] because it allowed them to be the preferred lenders on federal loans for these schools. And so that meant they would also have this very large volume of secured loans. But this time the guarantee came from the government, so it’s as if they were covered. Anyway, the people who were really screwed were the students.”

For these affected students, Navient has agreed to forgive $1.7 billion in current debt.

“Navient has repeatedly and deliberately put profits ahead of its borrowers,” said Pennsylvania State Attorney General Josh Shapiro, a top spokesman for the legal fight.

The Ministry of Education welcomed the settlement.

“We are pleased to see the outcome of this case and look forward to continuing our work with state and federal regulators to create higher standards for servicers and combat service practices that harm borrowers,” said Fabiola Rodriguez, the department’s deputy press secretary, in a statement. .

In a statement, however, Navient said the settlement should not be taken as an admission of guilt.

“The company’s decision to resolve these matters, which were based on unsubstantiated claims, allows us to avoid the additional burden, expense, time and distraction that prevails in court,” said the General Counsel. of Navient, Mark Heleen, in a statement. “Navient is committed to and has always strived to help student borrowers understand and select payment options that suit their needs.”

In September, Navient announced that it would leave the federal student loans program and hand over its portfolio to a new servicer.