After years of struggling to make payments that barely dented the loans she took out to attend a now defunct art school, Victoria Linssen saw a ray of hope. A deal reached last month between 39 states and Navient, a student loan giant accused of unfairly ensnaring borrowers like it, would wipe out $1.7 billion in private student loans.
Then she read the fine print: people like her who made their payments on time were excluded from aid.
Even though prosecutors said Navient made predatory loans to hundreds of thousands of borrowers it knew it couldn’t afford, the settlement only covered about 66,000 defaulters. Those who managed to pay off their deceptively high-interest debt — mostly to attend for-profit schools that left them with worthless degrees — would just have to keep paying.
“I was amazed,” said Ms Linssen, 57, who sent Navient about $500 a month – sometimes skipping errands to do it – after graduating from Brooks Institute, an art school for-profit company in California that abruptly closed in 2016. She struggled to put her degree to good use and now works as a digital marketing manager in Muncie, Indiana, where her salary extends further.
“It’s incredibly unfair,” she said. “If you were defrauded by your school, you were defrauded and your loans should be released whether you paid them or not.”
The settlement ended nearly a decade of state investigations into the role of Navient, the lender and loan servicer that has long been the linchpin of the education loan market, played in a cycle gloomy of vulnerable students, dubious for-profit schools and taxpayers’ money.
State prosecutors said Navient, which did business as Sallie Mae until 2014, was willing to make private loans to borrowers it knew were unable to repay because they were a losing lure of money for a much more profitable product: federal student loans.
Beginning in the early 2000s, Navient and the schools it worked with used private loans to bridge the gaps for students who relied on government-guaranteed loans from Navient to pay the bulk of their tuition.
Even if the private loans were not repaid, the federally guaranteed loans were ironclad revenue for Navient – and the more borrowers it attracted, the more money it made. An internal Navient email cited in court documents described private lending as a “baited hook” to attract more government-backed loans.
Navient began to scale back the tactic only after it and other lenders it faced were engulfed in a series of scandals over their practices; the strategy largely ended after the federal government began lending directly to students in 2010.
Navient and the states both called the settlement a victory: Navient failed to admit wrongdoing and avoided lengthy court battles, while prosecutors trumpeted the $1.7 billion in forgiven debt.
But Navient never expected to be reimbursed for much of that money. The actual value of the debt it wrote off, the company told its investors, was just $50 million.
And Navient didn’t have to compensate borrowers who stayed on top of their payments. They will have to keep paying Navient, often for a decade or more, for private loans that state officials say should never have been made.
“It feels like such a betrayal – we are being penalized for paying our debts,” said Jacqueline Strouse Schible, 39, who attended the Art Institute of California campus in San Diego, where she lives. She pays Navient $600 a month out of a $23,000 balance for her own private loans and those she co-signed for her mother, who attended ITT Technical Institute. Both schools collapsed after state and federal crackdowns.
Schools like the Chain Art Institute and ITT Tech — big players in an industry with a history of poor student outcomes — were crucial to Navient’s strategy.
A long-standing government policy, the so-called 90/10 rule, requires for-profit schools that receive federal student loans to obtain at least 10% of their funding elsewhere. The intention is to require schools to demonstrate that they can attract other sources of support.
By using its private loans to help schools bridge this gap, Navient has ensured a steady supply of borrowers for its government-backed loans. Their ability to repay private loans was irrelevant: One set of particularly risky loans had a default rate that peaked at 87%, according to the Pennsylvania attorney general, but the number of loans Navient made to those borrowers rose. from 706 to 54,000 in 2006. 2000. Some schools even subsidized Navient losses.
“If the borrower can create condensation on a mirror, he should get a loan this year,” Thomas Fitzpatrick, former chief executive of Navient, said at a 2007 meeting, according to court documents.
Although Navient has issued hundreds of thousands of private loans as part of its strategy, it is unclear how many borrowers are still repaying the lender. Some have repaid or refinanced their loans, and Navient declined to say how many loans it still holds from that period.
Matthew Revezzo, 32, took out public and private loans in 2007 to fund his bachelor’s degree in graphic design. He borrowed $130,000 to attend the New England Institute of Art, part of a chain then owned by Education Management, which went bankrupt in 2018 after facing state and federal charges for its tactics of recruitment.
Mr. Revezzo, who lives in Natick, Mass., chose the school because it promised employers were eager to hire its graduates. But each application ended in rejection. A recruiter finally matched him: the school had a bad reputation and Mr. Revezzo’s skills could not get him hired.
“I was floored,” Mr. Revezzo said. “I had a degree. I had worked hard for it.
He found work in an unrelated field – he’s a digital production specialist – but his six-figure debt was oppressive and double-digit interest rates on his private loans stifled his progress. Four years ago, he refinanced his two most expensive Navient loans with another lender. He kept the most affordable: $13,000 at almost 11% interest.
The $1,100 he pays each month for his private loans is roughly his rent. For years, Mr. Revezzo worked seven days a week, adding evening and weekend shifts at a supermarket to his day job. He now earns enough to skip the second job, but he’s still waiting for the medical attention he needs but can’t afford.
Being kicked out of the Navient colony was “infuriating”, Mr Revezzo said. “I know people who have failed and are now overwhelmed. They have no debt. It lowered their credit score and they can get on with their lives, while I keep my wheels turning.
Eileen Connor, director of the Project on Predatory Student Lending, which represents former students of for-profit schools, said states used a familiar playbook to get to settlements.
“It’s ‘Let’s make this big, banging announcement’ that creates the impression in the minds of the public – and, unfortunately, in the minds of the people who have these loans – that the relief is here,” she said. declared. “But when you go into the details, it doesn’t really help a lot of people.”
State officials who made the deal are sticking with it.
Rob Bonta, the California attorney general, said the settlement focused on borrowers who were “most affected by the bad practices – they were the most distressed, the most needy”. The agreement punishes “a bad actor who sent a lot of bad debts into the student world,” said Mr. Bonta, whose state was one of five to lead the settlement.
Borrowers who are covered by the agreement – generally those who had been in arrears for at least seven consecutive months before June 20, 2021 – were delighted. Their remaining Navient private loans, averaging nearly $26,000, will be forgiven. “I’m going to sleep better,” one borrower, Ashley Hardin, told The New York Times last month.
But borrowers who have been left out have few options.
They can seek to have all federal loans eliminated through a program known as “borrower repayment defense,” which can wipe out student loans whose schools defrauded them. Some defunct schools cited in the states’ Navient regulations, including ITT and Marinello Beauty Schools, are already covered by the program. Department of Education officials added a still-operating channel, DeVry University, to the list on Wednesday, and more applications may be approved soon.
But this system does not cover private loans. Borrowers who want these wiped out can pursue their own litigation against Navient, although their chances are slim.
“You rely on state laws that prohibit deceptive practices, and the strength of those laws vary widely,” said Adam Minsky, a Boston attorney who specializes in student loan cases. “Many state court judges do not favor allegations that the loan was used to attend a predatory school. There is a real feeling that if you signed up for the loan, you have to pay it back.
Ms Linssen, who still owes $70,000 for private loans she took out to attend the Brooks Institute, a California for-profit that abruptly closed in 2016, said she hoped to sue Navient. She kept paying her private loan bill because she doesn’t want to put her mother, who co-signed the loan, on the hook.
“Otherwise I would have strategically defaulted,” Ms. Linssen said.
While her debt weighs on every financial decision she makes, Navient is now freed from “the burden, expense, time and distraction” of state claims, the company said in a statement.
The settlement should never have been necessary at all, added Paul Hartwick, a spokesperson for Navient. “Our position that these allegations are baseless and baseless has remained unchanged since these cases began nine years ago,” he said.
Navient has not issued federally guaranteed loans for more than a decade and announced last year that it would stop repaying millions of federal loans on behalf of the government. It is now focusing on its booming private lending business: Navient originated $6 billion in private student loans last year, making it the largest provider in the country.
Last month, Navient announced earnings of $717 million for 2021. “Our most comprehensive and successful year ever,” said Jack Remondi, chief executive of Navient.
He added: “It was a year where we exceeded all of our targets.”