Today, the amount of outstanding student loan debt is estimated to be over $1.4 trillion, more than credit card and auto loan debt. That debt was incurred by over 44 million people, of whom slightly more than 1 in 10 will default.
Like many other consumer financial products, student loans are not as simple as you might assume. Like mortgages, many student loans are serviced by a collector who had no role in providing the loan itself. Their job is, essentially, to collect your money every month, apply it to principal and interest, and adjust your balance accordingly.
This week, the largest servicer of student loans – Navient – was sued by the federal and some state governments. Navient manages the loans of 12 million borrowers – almost 1 out of every 4 Americans with student loan debt. According to the lawsuits, Navient mismanaged the loans it services and as a result illegally drove up the costs of repaying those loans. Among other things.
Of course, the job of student loan services like Navient is not as simply as merely sending you a monthly bill and processing your payment. There are many options for students to repay their loans, and servicers like Navient are responsible for presenting borrowers with a full menu of repayment plans. However, according to the lawsuits, Navient created a system to incentive its representatives to push borrowers away from income-based repayment plans – which would lower borrower costs – to avoid the burdens involved in enrolling borrowers in those plans and, more importantly, to maximize its own profits.
The allegations against Navient are akin to the financial industry improper handling of accounts and foreclosures leading up to and following the 2008 financial crisis. Then, as here, borrowers were steered into a monthly repayment scheme that was in the bank’s, and not the consumer’s, best interest. Then, as here, widespread, institutionalized misconduct resulted in improper defaulting and damage to credit scores. The mortgage servicing mismanagement resulted in more than $100 billion paid out in settlements. Only time will tell if an industry servicing $1.4 trillion in debt held by 44.2 million people could face similar consequences.
Authored By: Chris Markos