Hello folks. Today I have a contributed post from Tyrel Luck, a fellow personal finance buff. He has a very interesting article to share with us on Navient, the largest student loan servicing company. If you have a student loan, or are just interested in the latest and greatest on what has been impacting the student loan market, then this is a must read. And why wouldn’t you, everything is more interesting when politics gets involved…
So without further ado, let’s hear from Tyrel…
Millions of students struggle to cross over the graduation line without taking on some form of student loan debt, whether public or private. Over the last few decades, the total student loan debt has grown exponentially, estimated at a massive $1.3 trillion spread over more than 40 million borrowers. Securing financing for higher education is a relatively simple process – all it takes is a brief application and a verification of school enrollment. Unfortunately, managing that student debt after graduation is a growing concern for borrowers and the federal government.
One of the companies tasked to work with borrowers to ease the process of managing student loan repayment is Navient, the largest student loan servicer of federal student loan debt. Navient has made headlines in the last few weeks of the year given the new administration’s potential push to revert power – and earning potential – back into the hands of private student loan servicers instead of the federal government. The company’s stock price jumped nearly 30% in the days after the election, but recent news has investors less optimistic about the company’s future in the world of student loan servicing.
In early December, Navient lost out on a significant government contract that it had been banking on, especially after a weak fourth quarter. The contract, awarded to 7 other loan servicers out of 48 total bids, would have given Navient the ability to collect on defaulted federal student loan debt over the next ten years. The company has enjoyed tens of millions of dollars in revenue from a similar contract over the last 20 years, but that revenue-producing agreement ends in the upcoming year. Representatives from the Department of Education estimate that the value of that contract alone could produce as much as $417 million in revenue for the seven winning companies.
Debt collection is a lucrative business for student loan servicers, given that nearly one in every six borrowers throughout the country (3.6 million individuals) are in default on their student loans. Adding to the issue are the additional 3 million borrowers who are delinquent on their student loan repayment, meaning they are at least one month behind. Debt collection practices for student loans are more serious than other consumer debts, like credit cards or personal loans. The federal government has the ability to garnish wages and withhold tax refunds for borrowers who don’t repay, making collecting on debt an easier revenue-producing unit of a student loan servicer like Navient.
Why Navient Was Shut Out
Unfortunately for the company, the behemoth student loan servicer won’t have the opportunity to collect on the nearly $122 million in defaulted student loans in the upcoming years. Part of the reasoning behind the lost contract bid is the shaky ground Navient has been on with the federal government and the Consumer Financial Protection Bureau over the last three years. It’s debt collection subsidiary, Pioneer Credit Recovery, has come under fire for making inaccurate representations to student loan borrowers who were struggling to keep up with repayment schedules.
In an investigation spearheaded by the Department of Education, it was found that Pioneer failed to provide borrowers with information about the benefits of various federal programs which offer assistance with getting out of default with student loans. Some of these programs, like changes to credit reporting requirements and a waiver of specific collection-related charges, give student borrowers some hope that getting back on track is a real possibility. Pioneer, along with four other debt collection agencies contracted through the federal government, did not provide this information to borrowers when they were in contact. Instead, collection agents pressed borrowers for payment and were quick to move on to the next delinquent account.
In addition to problems with its debt collection department, Navient has been subject to a growing number of complaints relating to how it handles borrowers who are actively repaying their student debt. In one case, the Consumer Financial Protection Bureau sent Navient correspondence indicating it had found evidence of violations of consumer protection laws. In 2014, the company was accused of cheating service members protected under the SCRA by not providing an interest rate deduction while borrowers were on active duty. Additionally, numerous complaints have been filed with state and federal organizations regarding how the company applies additional payments to the benefit of the company, not the borrower.
The Future of Navient
In the days since the news of the lost contract for debt collection on federal student loans, Navient’s stock price has experienced a substantial decline. Representatives from the student loan servicer shared with investors that the singular contract did not represent all of the company’s revenue-producing activities, as it continues to service millions of loans for borrowers in active repayment. However, the lost contract and subsequent reduction in revenue generating by Pioneer Credit Recovery is a clear hit to the country’s largest student loan servicer.
Under the new administration, Navient may be able to recoup some lost revenue should a shift take place toward privatization of student loans in general. If that were to take place, Navient, along with other major players in the student loan marketplace including Nelnet and Great Lakes, may have an opportunity to generate higher revenues by stripping borrowers of certain income-based repayment plan options.
As it stands now, borrows with low income have the ability to repay their student loan debt based on a percentage of their earnings, not necessarily tied to a conventional amortization schedule linked to the total amount owed and the interest rate. In addition to removing lower payment options, the privatization of student loan servicing may come with higher interest rates for borrowers across the board.
The combination of these two potential changes in the student loan landscape could mean massive profits for student loan servicers – but a significant hit for borrowers who are already struggling to keep up with repayment. Some borrowers might be better off refinancing their students, transitioning to another servicer besides Navient. This could be a great choice, especially for those with credit scores greater than 750. Overall, changes to the student loan environment are needed to benefit the borrowers who want and are able to repay, but it has yet to be seen if the new administration will keep the focus there instead of on improving the bottom line of corporations like Navient.
Tyrel Luck is a personal finance enthusiast who took a special interest in student loans, especially after it became the second leading form of debt in the United States. Next on his list is to start a blog of his own.
Thanks for the great update, Tyrel, and best of luck to you on getting your blog up and running. You’ll find that it is a great personal finance blogging community. Don’t hesitate to reach out with any questions.