Loan Servicers Cleared

A year after U.S. prosecutors accused Navient of overcharging members of the military on student loans, Education Department review largely clears loan servicers of wrongdoing.

May 27, 2015

The U.S. Department of Education said Tuesday that its four main federal student loan servicers, including Navient, have mostly followed the law in granting special interest-rate benefits to members of the military.

Department officials released the results of their yearlong inquiry into whether the companies had overcharged service members on their federal direct student loans. The review largely cleared the companies of any wrongdoing, finding that service members were improperly charged in fewer than 1 percent of the nearly 900 cases examined.

The department does not plan to take any action against the loan servicing companies, which include Navient, Great Lakes, PHEAA and Nelnet. However, the department will work to reimburse the handful of service members it found had been improperly charged by the companies, an official said.

The review began last May when the Department of Justice accused Navient, formerly known as Sallie Mae, of overcharging members of the military by not capping their interest rate at 6 percent, as is required under the Servicemembers Civil Relief Act. Navient and Sallie Mae paid $97 million to settle the allegations, though they did not admit any wrongdoing.

Department officials twice missed their deadline for finishing the review, which was initially supposed to be completed within 120 days. A top department official told members of Congress last month that the review would be done by May 1.

Tuesday’s announcement comes after a group of Senate Democrats sent Education Secretary Arne Duncan a scathing letter last week, demanding to know the status of the investigation.

“The other federal watchdogs have done their jobs, and it is past time for you to do yours,” wrote the Democrats, led by Senator Elizabeth Warren of Massachusetts and Senator Dick Durbin of Illinois.

Education Department officials emphasized that their review of Navient and the three other companies focused only on members of the military who took out federal direct loans. The Justice Department’s investigation that led to the large settlement with Navient last year looked at the company’s private student loans as well as its portfolio of federally guaranteed student loans.

"We are pleased that the Department of Justice was able to do a review with a much wider scope than the Education Department's loan portfolio to ensure greater accountability for our men and women in uniform," Under Secretary of Education Ted Mitchell said in a statement.

At least one top Democrat, though, on Tuesday indicated she wasn’t satisfied with the department’s review.

Senator Patty Murray of Washington, the top Democrat on the Senate’s education committee, said in a statement that one service member being wronged on student loans “is one too many.”

“I’ve been deeply disappointed with the Department of Education’s conduct from the moment the appalling mistreatment of our service members by student loan servicers was first discovered,” Murray said. “Unfortunately, this report appears to raise even more questions instead of providing the answers and accountability our service members are owed.”

Rule Changes

Loan servicing companies have said that the Education Department’s guidance on how to give service members the benefits was unclear until last year.

The department has since required its loan servicers to proactively check a Pentagon database to see whether borrowers are on active duty and therefore eligible to have their interest rate capped. Last month, a negotiated rule making panel approved a new regulation that would require the servicers of older government-backed loans to also conduct such proactive checks.

New Contracts Coming

The four companies that were part of the review collectively manage student loan payments on behalf of government for the vast majority 27.8 million direct loan borrowers.

Under pressure from some Senate Democrats, as well as a collation of consumer, student, and labor groups, the department is exploring new ways to structure its contracts with the companies.  The Consumer Financial Protection Bureau has also indicated recently that may become more aggressive in policing student loan servicing, including the companies that the Education Department hires.

Officials last year renewed its loan servicing contracts with some changes to how the companies were paid, though the new contracts failed to assuage the concerns of Democrats like Warren.

The department is currently deciding how to restructure those contracts again, and plans to hold a new competition for bids this summer, a department official said Tuesday. 



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