Two states are accusing a major student loan company of intentionally giving bad loans to students who couldn't afford them.
In two lawsuits, filed after a three-year invesigation, state attorneys in Washington state and Illinois claim student loan company Navient used predatory lending practices, according to a report by Stacey Cowley and Jessica Silver-Greenberg at The New York Times. Navient, which was spun off from Sallie Mae in 2014 and took much of its student loan business with it, has denied the accusations and is fighting the lawsuits.
“These loans were designed to fail,” Shannon Smith, the chief of the Washington State attorney general’s consumer protection division, told the Times. Sallie Mae reportedly expected as much as 92 percent of the loans from 2000 to 2009 to default.
But why would a student loan company want to give money to borrowers who can't pay it back?
An internal Sallie Mae memo reportedly included in the Illinois lawsuit shows the company used bad private loans to build relationships with colleges. Those relationships allowed Sallie Mae and Navient to service more federal loans, which are guaranteed by the U.S. government. If a student defaults on a federal loan, the government will reimburse the loan company for most of the loan.
In sum, the alleged strategy was to lose some money in order to make much more. Meanwhile the students who couldn't truly afford the sub-prime loans but have managed to avoid default are making huge monthly payments on their loans. Ashley Hardin, who lives in Seattle, took out $150,000 for school. Her monthly payment is now more than her rent, she told the Times.
The federal government is also suing Navient.
The federal Consumer Financial Protection Bureau filed a lawsuit against Navient in January, accusing the company of illegally steering low-income federal loan borrowers from income-based repayment plans to forbearance. Forbearance allows borrowers to temporarily stop payments on student loans during a period of financial hardship; it is not recommended for low-income borrowers. When a loan is in forbearance is still accumulates interest.
"For years, Navient failed consumers who counted on the company to help give them a fair chance to pay back their student loans," CFPB Director Richard Cordray said in a Jan. 18 press release. "At every stage of repayment, Navient chose to shortcut and deceive consumers to save on operating costs. Too many borrowers paid more for their loans because Navient illegally cheated them and today's action seeks to hold them accountable."
News of the lawsuits spurred Rep. Pramila Jayapal (D-Wash.) to once again call for tuition-free public college.
Jayapal and Vermont Sen. Bernie Sanders introduced the College For All Act into the House and Senate respectively last week.
“Higher education in America should be a right for all, not a privilege for the few,” Sanders said. “If we are to succeed in a highly competitive global economy and have the best-educated workforce in the world, public colleges and universities must become tuition-free for working families and we must substantially reduce student debt.”