Government sues America's largest student loan company

5 stunning stats about college debt
5 stunning stats about college debt

Sallie Mae has long drawn the ire of student loan borrowers struggling to pay back their debt.

But as it turns out, they might have had a real reason to complain.

On Wednesday, the federal government and the Washington state Attorney General sued Navient, formerly part of Sallie Mae, for allegedly cheating borrowers out of their repayment rights. Another lawsuit filed by the Illinois Attorneys General named both Navient and Sallie Mae.

The two companies handle student loan payments from millions of borrowers.

"At every stage of repayment, Navient chose to shortcut and deceive consumers to save on operating costs," said Richard Cordray, the director of the Consumer Financial Protection Bureau, which brought the federal suit.

Navient, which spun off from Sallie Mae in 2014, is currently the biggest student loan servicer in the country, handling more than 12 million accounts. About half of those borrowers have federal loans and the other half are private.

About one in four student loan borrowers have Navient as their loan servicer, according to the CFPB. That means Navient is where they're sending their monthly checks to pay off their loans.

The CFPB's allegations go back as far as 2010. It claims that Navient steered struggling borrowers toward paying more than they had to, and misallocated borrowers' payments when made across multiple loans, for example. It also alleges that in some cases, Navient erroneously reported borrowers had defaulted on their loans, damaging their credit score.

Related: Students are graduating with $30,000 in debt

In a statement, Navient said these allegations are unfounded and that "the timing of this lawsuit -- midnight action filed on the eve of a new administration -- reflects their political motivations."

"The suit improperly seeks to impose penalties on Navient based on new servicing standards applied retroactively and applied only against one servicer," the company said.

Navient is one of nine companies that are contracted by the government to service federal student loans.

The government also claims Navient (NAVI) made it harder for borrowers to enroll in an income-driven repayment plan, which can be used to lower their monthly payment if they're struggling to pay. The suit says that Navient instead encouraged borrowers to enter forbearance (temporarily stopping payments altogether) because it required less paperwork and fewer staff resources. Meanwhile, these borrowers racked up additional unpaid interest.

But Navient says that this assertion ignores the fact that almost half of the federal loans it services are enrolled in income-driven plans.

Related: Don't be fooled by student debt relief scams

The Attorneys General suits not only allege problems with the loan servicing, but also with loan origination, claiming that problems started as early as 2000.

Sallie Mae put student borrowers into "expensive subprime loans that it knew were going to fail," said Illinois AG Lisa Madigan.

She said her office reviewed thousands of consumer complaints and hundreds of phone calls.

The state lawsuits are seeking debt relief for those borrowers who took out these "subprime" loans. The states, and the CFPB, are also seeking money for borrowers who may have been hurt by the companies' servicing practices, as well as civil penalties.

Anyone who borrowed a private loan from Sallie Mae prior to 2010 or currently has their loan serviced by Navient could be impacted, said Washington AG Bob Ferguson.

Sallie Mae (SLM), which was named only in the Illinois suit, said on Wednesday that Navient would accept responsibility for all costs arising from this matter as per an earlier agreement. The two have operated as independent companies since 2014.

Correction: A previous version of this story incorrectly stated that Sallie Mae was also named in the Washington AG's lawsuit.

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