Why This Billionaire Is Betting On Troubled Student Loan Giant Navient

"The problem is the regulators, not the company," said Leon Cooperman, founder of the hedge fund Omega Advisors.

To some federal and state regulators, student loan giant Navient Corp. is a company that too often mistreats borrowers and deprives them of their right to make affordable monthly payments. To Leon Cooperman, a shareholder and billionaire investor, Navient is an undervalued company that the government is beating up on for no good reason.

Student debt has emerged as a dominant policy issue, with both Democratic and Republican politicians jostling over ways to lower college costs and make student loans more affordable. More than 40 million Americans collectively owe about $1.3 trillion on their student loans -- a product of increased college enrollment, reduced higher education spending by state legislatures, and runaway tuition hikes. Washington policymakers have warned that overly indebted households may have no choice but to cut back on spending and investments, depressing the economy's growth.

It is against that backdrop that regulators and some Democratic lawmakers have begun to target student loan servicers such as Navient, which collect borrowers' monthly payments on behalf of creditors and counsel them on their repayment options. Unlike other forms of consumer debt, nearly all federal student loan borrowers are eligible to make monthly payments based on their earnings. Yet student loans have the highest delinquency rate of common household debt, according to the Federal Reserve Bank of New York.

At stake is the future of a company that Wall Street now values about 40 percent lower than it did at the start of the year. Navient faces escalating government investigations and questions over how the company is dealing with borrowers whose loans are its main money-making asset. Those loans are slowly being paid down from a government program that ended in 2010.

In a brief interview Wednesday, Cooperman, founder of the prominent hedge fund Omega Advisors, put the blame for Navient's decline squarely on government regulators. He likened the bruising treatment of Navient to politicians' bashing of mortgage giants Fannie Mae and Freddie Mac for backing home loans to borrowers during the housing boom that soured during the financial crisis and resulting recession.

"From everything I've read about what they've done, they do a good job for students," Cooperman said of Navient. "The problem is the regulators, not the company. The regulators may not be doing a good job."

Cooperman, whose firm owned about 2 percent of Navient stock as of June 30, said Navient is worth $23 per share. Navient closed Wednesday at $12.89.

Navient, formerly known as Sallie Mae, is fighting to avert a lawsuit from the Consumer Financial Protection Bureau, or CFPB, for allegedly cheating borrowers. The federal regulator told the company in August that its investigators had found evidence indicating that Navient had violated consumer protection laws.

Navient also is battling a group of state attorneys general, who have been investigating the company for alleged misdeeds for nearly two years. The company has denied wrongdoing.

Consumers have filed thousands of complaints with the CFPB against Navient. A Huffington Post analysis earlier this year found that no company had paid out more money in refunds to aggrieved borrowers with private student loans than Navient, a sign that the company is acknowledging errors.

Last year, the Department of Justice accused Navient and Sallie Mae of intentionally cheating active-duty troops on their federal and private student loans by overcharging them in violation of federal law for nearly a decade. The Federal Deposit Insurance Corp. alleged the company processed borrowers’ monthly student loan payments in a way designed to maximize late fees.

Sallie Mae and Navient neither admitted nor denied wrongdoing, though Navient's chief executive, Jack Remondi, apologized to troops for what he described as "processing errors."

But to Cooperman, whatever misdeeds Navient has allegedly committed are outweighed by the "social good" of the company's operations that inevitably help students afford higher education.

His view is shared by some at the Department of Education, which earlier this year cleared Navient of wrongdoing in connection with its servicing of troops' federal student loans. The department also has increased the number of accounts it has sent Navient under its lucrative servicing contract, and jacked up its pay as well, government records and Navient securities filings show.

But regulators' treatment of Navient is similar to "the government crapping all over Fannie and Freddie," Cooperman said. "The government wanted Fannie and Freddie to extend all these loans to people so they could own homes."

But the government officials who pushed Fannie Mae and Freddie Mac to back ever-riskier loans were never held accountable, Cooperman said. Instead, government officials beat up on Fannie and Freddie executives.

"The government doesn't seem to appreciate them," Cooperman said of Navient. "Maybe we should just go home, give the keys to the government, and liquidate the company."

During Navient's quarterly earnings call on Wednesday, Cooperman suggested as much to Navient executives. With Navient shares trading for so much less than Cooperman says they're worth, he asked company executives whether the board of directors had considered liquidating the company to return money to investors so they could "invest in companies that are more appreciated by shareholders or the government."

Cooperman's firm has pared back its holdings of Navient stock, from 9.8 million shares as of Sept. 30 of last year to 7.7 million shares as of June 30 this year, filings with the Securities and Exchange Commission show.

Cooperman told Navient executives that his question was more philosophical in nature, but he made his point clear: The company should be doing everything it can to buy back its shares in order to drive up their value.

It's a common lament shared by investors who own stock in companies they believe are worth much more than financial markets value them. By buying back shares, and reducing the number of shares trading in the market, Navient could boost its share price, benefitting investors like Cooperman.

To that end, Cooperman said in the interview, Navient should be borrowing money to fund stock buybacks -- especially since the company could borrow for much less than it is paying its shareholders in the form of quarterly dividends.

"There's no better use of shareholder money than buying something back at 50 cents on the dollar, particularly in this environment where there's very few things selling at 50 cents on the dollar," Cooperman said on the earnings call.

But Navient has been doing exactly that, buying up stock over the past year in a bid to boost the company's lagging shares. Despite reducing the amount of outstanding shares by 11 percent during the year that ended June 30, Navient's stock price rose only 3 percent. Since then, it has fallen 29 percent.

"We're on sale," Cooperman said of Navient during the company's earnings call.

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