Payment misapplications, costly forbearances, misinformation, foot-dragging…
These are some of the allegations facing Navient Corporation, its subsidiaries Navient Solutions Inc., Pioneer Credit Recovery Inc. and General Revenue Corporation, along with its former parent, Sallie Mae Bank, in a series of lawsuits filed earlier this year by the Consumer Financial Protection Bureau, and two state attorneys general (Illinois and Washington).
Navient has denied all wrongdoing and plans to contest what it says are unfounded and politically motivated accusations.
As these lawsuits wind their way through the courts, an obvious question lingers: Why would any financial services company run this kind of legal and reputational risk?
Let’s start by acknowledging that restructuring troubled debts takes time. Multiple conversations with the borrowers, acquiring and analyzing relief requests and supporting documentation (e.g., financial statements, tax returns and payroll stubs), calculating new payment amounts, recalculating amortization schedules… All this takes time, and time is money.
There is, however, more to this story than shaving a few pennies of cost.
The lawsuit alleges the mishandling of private and government-backed student loans, of which the Federal Family Education Loan Program (FFELP) loans are a part. The program was discontinued in 2010 after the Obama administration concluded that a public-private partnership — where the private sector (banks and other financial institutions) originates, owns and services education-related loans backed by the full faith and credit of the U.S. government — costs taxpayers more than if the government were to do all that itself. Hence the introduction of the Federal Direct Loan Program, which now accounts for about $1 trillion of the roughly $1.4 trillion student-loan market.
Consequently, the approximately $300 billion worth of government-guaranteed, private-sector owned FFELP loans outstanding represent an attractive investment opportunity, not least because of their rapidly diminishing supply. Navient is the nation’s largest holder of these.
But just how attractive can student loans be to investors when nearly half of them currently in repayment are either delinquent, in default, in forbearance or — God forbid — already restructured under one of the many government-sponsored relief plans? “God forbid” because those plans — to which federal student loan borrowers are legally entitled — may well compromise the economic rates of return that attracted investors in the first place.
I believe this is why temporary and costly forbearances (for borrowers) may be touted over government-sponsored restructures: to protect a business model that hinges on the profits that are earned not just for originating and servicing these contracts, but for securitizing them as well.
It’s also why I am as concerned about the $1 trillion worth of Federal Direct loans that currently reside on the Department of Education’s books as I am the $300 billion currently in repayment.
At some point, all or part of that portfolio will be divested, not least because the underlying loans are dollar-for-dollar funded with borrowed money — roughly 5% of total federal debt, in fact — in an era where raising the federal debt limit also raises everybody’s blood pressure. Divestiture is the likely consequential outcome, and when that happens it’ll be FFELP all over again.
The trillion-dollar question, therefore, is how will the Trump administration’s newly managed Department of Education safeguard education borrowers against the predatory practices alleged in the Navient case?
Not all that energetically it seems, given that the ED Under Secretary Betsy DeVos has been busy rescinding Obama-era policy memos that were intended to shield consumers from such harm. Nor has the department said boo about Navient’s plan to acquire an additional $3.7 billion of federal student loans from JPMorgan Chase — more than half of which Navient may end up securitizing — while the CFPB’s case has yet to be adjudicated.
Seems to me that the simplest, least politically fraught and most expedient way to deal with the so-called student debt problem is to restructure all government-backed loans — FFEL and Federal Direct, alike — by doubling remaining loan durations and permitting borrowers to accelerate their repayments without penalty.
Three reasons for this.
First, the standard 10-year loan term is too short (and the resultant payments too high), given today’s average level of indebtedness. By doubling the starting or remaining term, the borrower will gain relief that is comparable with what the government offers under its various Income Based Repayment and Pay As You Earn plans. As for the “penalty-free accelerated repayment” part, it ensures that borrowers who don’t need the lower-payment/longer-term accommodation can easily forego that by continuing to make their originally agreed-to remittances.
Second, not only are the government’s relief plans confusing to consumers, but they also necessitate annual requalification and reenrollment. This is but one of the reasons why so many financially distressed borrowers end up re-defaulting on the same debts. Restructuring the portfolio en masse obviates the need for this costly administrative layer.
Finally, a fully restructured loan portfolio lets everyone — borrowers, loan administrators, investors and taxpayers — know where they stand at the outset and over time.
To paraphrase Occam’s Razor, the simplest solution is often the correct one.