One year after the U.S. Department of Justice accused student loan giant Navient Corp. of intentionally cheating active-duty troops on private and federal student loans, the Education Department is likely to effectively clear the company of lawbreaking.
Separate investigations into Navient’s conduct by Education Department staff and Ernst & Young, an outside audit firm the department hired to double-check its own staff’s work, found that the company largely complied with the Servicemembers Civil Relief Act, the law the Justice Department exactly one year ago accused Navient of violating, when dealing with troops’ federal student loans, according to two people familiar with the inquiries.
Acceptance of the findings by senior Education Department officials would stand in sharp contrast to a May 2014 lawsuit filed by the Justice Department alleging that Navient, and its former owner, SLM Corp., or Sallie Mae, had overcharged troops on their federal student loans in violation of the servicemembers law and made it difficult for troops to access other benefits under the provision. The law has capped interest rates on federal student loans for active-duty troops at 6 percent since 2008.
Clearing Navient also would raise questions about the strength of various federal investigations into the company's conduct. Student loan activists have encouraged the Education Department to take a harder line against corporate wrongdoing and Sen. Elizabeth Warren (D-Mass.), among other congressional Democrats, have criticized the department's lax supervision of contractors.
Education Department staff outside Washington also concluded the department's other loan servicers complied with the servicemembers' law. Those investigators determined the contractors acted within the department's interpretation of the servicemembers law, which called for troops to specifically request the law’s benefits in writing and to provide a copy of military orders for active duty.
In many instances, these sources said, the loan contractors were too generous to military borrowers by allowing them, for example, to postpone payments without requiring certain paperwork.
The Education Department has yet to announce the results of its investigation, originally due in September 2014. The deadline was moved to May 1, which the department also missed. The results, sources said, aren’t final and could change now that they’re in the hands of Washington-based Education Department officials. The Huffington Post reported in October 2014 that the department's investigators had cleared Navient and other student loan companies of wrongdoing, but hadn't publicly announced the results. The department then hired Ernst & Young.
Denise Horn, an Education Department spokeswoman, didn’t respond to repeated requests for comment. Dena Iverson, a Justice Department spokeswoman, didn’t respond to a request for comment. Also failing to reply to requests for comment were representatives of other major Education Department loan servicers: Patricia Christel of Navient; Keith New of Pennsylvania Higher Education Assistance Agency, commonly known as FedLoan Servicing; Ben Kiser of Nelnet Inc.; and Brett Lindquist of Great Lakes Higher Education Corp. & Affiliates.
Federal authorities said in May 2014 that Navient broke the law in multiple ways: The company failed to honor troops’ requests after receiving them, did not follow up with troops whose documents may have been deficient, failed to inform troops of the 6 percent cap when they requested other benefits under the law, and improperly told service members that they must be deployed in order to receive benefits.
According to the Justice Department, an audit of the company’s systems revealed that just 7 percent of troops on active duty who had student loans with interest rates above 6 percent, and whose loans had a special military identification code in the companies’ computer systems, had their rates capped under the law. The remaining 93 percent paid much more than they should have under the law.
Federal prosecutors said the company’s conduct was “intentional, willful, and taken in disregard for the rights of servicemembers.”
Many of the aggrieved troops' student loans were owned by the Education Department. Federal prosecutors said a majority of troops gave Sallie Mae and Navient paperwork that made clear they were eligible for the servicemembers law’s protections.
“This type of conduct is more than just inappropriate. It is inexcusable and it will not be tolerated,” then-Attorney General Eric Holder said a year ago.
Federal prosecutors’ allegations suggested that Navient had violated its loan servicing contract with the Education Department. The contract prohibits companies from violating relevant federal and state laws, such as the servicemembers provision.
The Justice Department allowed Navient to settle the claims without admitting or denying wrongdoing, funding an account with $60 million that would be used to refund some 60,000 aggrieved troops. Education Secretary Arne Duncan announced what he described as a “thorough” review to determine the company’s guilt or innocence.
The Education Department used its own staff to probe the company’s compliance with the law, then hired an outside audit firm to further investigate -- bringing the total number of inquiries into the matter to at least five, which includes a brief Consumer Financial Protection Bureau review, the company’s own internal investigation and the Justice Department’s probe.
After a year of probes, the Education Department’s findings suggest that Navient will keep its contract to collect borrowers’ monthly payments and counsel them on their repayment options.
Borrower advocates, including the AFL-CIO, the nation’s largest labor federation, had urged the department to cancel the company’s contract in the wake of the Justice Department’s lawsuit. The American Legion, the influential veterans organization, criticized the Education Department for dragging out its probe of Navient, and publicly speculated that the department appeared more interested in protecting its contractor than service members.
At the root of the Education Department’s inquiry was a fundamental disagreement with the Justice Department over how to judge lawbreaking, sources said.
The Education Department interpreted the servicemembers law in a manner that put a heavy burden on troops. For example, they had to specifically request the interest rate cap in writing, and they had to provide a copy of their military orders that had to include the end dates of their active-duty tours -- even though officers in the military often don’t have end dates on their orders.
Until recently, the websites for all four of the department’s major loan servicers -- Navient, FedLoan, Nelnet and Great Lakes -- directed service members to submit their requests in writing, along with a copy of their military orders.
In contrast, the Justice Department, which enforces the law, has taken a more troop-friendly interpretation. For example, Navient was accused of breaking the law in part because it didn’t tell troops about the interest rate benefit when they requested other benefits under the servicemembers law.
The Education Department judged its contractors’ compliance according to its interpretation of the statute, rather than the Justice Department’s. The Education Department has since relaxed its standards after Justice Department pressure to make it easier for troops.
Navient agreed to refund aggrieved troops as part of its settlement with the Justice Department. It's unclear whether the Education Department has required its other servicers to compensate aggrieved troops.
With one glaring exception -- the Education Department stopped sending a Navient subsidiary new accounts under its debt collection contract -- the department has largely treated Navient more as a trusted ally than as a regulated entity, consumer advocates said.
For example, a few weeks after the Justice Department settlement, and a related news conference in which Duncan threatened the company’s lucrative loan servicing contract, the Education Department quietly renewed the contract. It has since sent the company more accounts under that contract and increased its pay.
The department also has yet to recoup some $22 million in alleged overpayments to the company its inspector general recommended it collect in 2009, according to the company’s most recent quarterly report to investors. Navient also is still in the running for the department’s new debt collection contract.
Sen. Elizabeth Warren (D-Mass.) in 2013 said that the Education Department risked becoming a “lapdog” as a result of its lackluster policing of student loan companies such as Navient.
“When students and families take out loans, they should be able to trust that the Education Department's servicers are following the law and delivering quality customer service to all of our borrowers,” Duncan said last May.