CFPB Ends Years-Long Fight with Navient by Banning Them From Providing Future Student Loans

By: Laura Pontari

Student loans are a heated topic that occupies a significant amount of policy debate in higher education. With borrowers struggling to repay massive loan debts, and public outcry for reformed lending practices, the Consumer Financial Protection Bureau (CFPB) has faced pressure to respond. Before the pandemic, approximately 1 in 5 borrowers were in default on their payments, and this has likely only gotten worse as a result of the pandemic.[1], The CFPB’s efforts to protect vulnerable borrowers were rewarded as they successfully barred Navient, one of the country’s largest student loan servicers, from servicing any future student loans .[2] This settlement ended a decade-long fight between the CFPB and Navient, where CFPB sought to expose the predatory practices Navient had engaged in while servicing student loans.[3] As a result, the company is now forced to repay $100 million to student loan borrowers, as well as pay a $20 million penalty to the CFPB.[4] Though the legal battle has ended for now, the impact of this settlement will have a ripple effect for decades to come.

On September 12, 2024, the CFPB entered into a settlement agreement with student loan servicer Navient.[5] The suit, initially filed in 2017, alleged decades-long abuse by the servicer, including taking advantage of vulnerable and struggling borrowers.[6] The CFPB claims that Navient misled borrowers in several different ways, including pushing them toward more costly repayment options and away from more affordable income-based repayment options, providing misleading information about the impact of student loans on credit scores, and mishandling payment processing.[7] The CFPB alleges this was especially true for struggling borrowers who were at risk of default, and the practices rise to the level of exploitation.[8] Research in 2021 by The Pew Charitable Trusts found that certain types of borrowers were more likely to be in default.[9] These included students who attended school exclusively online, did not complete the degree for which they took out loans, or attended school part-time.[10] Default can permanently taint a person’s creditworthiness and negatively impact their ability to apply for credit, including home and car loans. It can also cause other negative economic outcomes for borrowers, such as wage garnishment and withholding of tax returns.[11] Access to credit is critical for economic growth and stability, especially for low-income borrowers, making these practices all the more sinister.

The impact of this settlement will have a ripple effect on student borrowing—and the economy surrounding it—for decades to come. Continuing to crack down on predatory practices within the student loan servicing industry will put borrowers on notice that these practices will receive increased legal scrutiny. By holding a major student loan servicer accountable, the CFPB is setting a precedent that this behavior will not be tolerated by servicers moving forward. It also is consistent with governmental agencies holding higher education institutions that prey on vulnerable students accountable. In 2023, the Department of Education issued a rule aimed at regulating for-profit colleges, known as the “gainful employment rule.”[12] This rule requires schools to demonstrate that graduates can afford and pay back their loans after completing the program to receive federal student aid dollars.[13] Though the impact of the gainful employment rule is still forthcoming, the Federal Reserve estimates that a significant portion of for-profit schools will fail the test.[14] The gainful employment rule, in addition to the Navient settlement, is consistent with the Biden administration’s prioritization of legal scrutiny of student loan practices.

How student borrowers respond is yet to be seen, but the settlement is undoubtedly a win for borrowers. This settlement further protects borrowers from predatory student loan practices. In conjunction with other efforts made by the Department of Education, this settlement ensures that servicers will be on notice and know they will be held accountable for predatory behavior. Borrowers should continue to monitor how other servicers in the space adjust their practices based on this settlement, but it is a positive first step toward a more transparent and fair student loan system.

[1] The Critical Issue of Student Loan Default, The Pew Charitable Trs., https://www.pewtrusts.org/en/research-and-analysis/articles/2024/01/26/the-critical-issue-of-student-loan-default (Jan. 30, 2024).

[2] Jonathan Franklin, Navient Reaches $120 Million Settlement for Misleading Student Loan Borrowers, NPR (Sept. 12, 2024, 5:01 PM), https://www.npr.org/2024/09/12/nx-s1-5110124/navient-lawsuit-settlement-student-loans.

[3] CFPB Bans Navient from Federal Student Loan Servicing and Orders the Company to Pay $120 Million for Wide-Ranging Student Lending Failures, Consumer Fin. Prot. Bureau (Sep. 12, 2024), https://www.consumerfinance.gov/about-us/newsroom/cfpb-bans-navient-from-federal-student-loan-servicing-and-orders-the-company-to-pay-120-million-for-wide-ranging-student-lending-failures/.

[4] Jonathan Stempel & Douglas Gillison, Navient Accepts US Student Loan Ban, Pays $120 Million in CFPB Settlement, Reuters (Sept. 12, 2024, 1:14 PM), https://www.reuters.com/markets/us/us-bans-navient-federal-student-loan-serving-orders-120-mln-payment-2024-09-12/.

[5] Id.

[6] Danielle Douglas-Gabriel, Student Loan Servicer Navient Reaches $120 Million Settlement, Wash. Post (Sept. 12, 2024), https://www.washingtonpost.com/education/2024/09/12/navient-student-loans-settlement/.

[7] Michael Stratford, Navient, CFPB Reach $120M Settlement Over Landmark Student Loan Servicing Case, Politico (Sep. 12, 2024, 1:11 PM), https://www.politico.com/news/2024/09/12/navient-cfpb-settlement-00178860; see Franklin, supra note 2 (listing how CFAB alleges that Navient misled and harmed student loan borrowers).

[8] Franklin, supra note 2.

[9] Lexi West et. al, Borrowers With Certain Educational Experiences Appear More Likely to Default, The Pew Charitable Trs. (Jan. 30, 2024), https://www.pewtrusts.org/en/research-and-analysis/articles/2024/01/30/borrowers-with-certain-educational-experiences-appear-more-likely-to-default.

[10] Id.

[11] Student Loan Default has Serious Financial Consequences, The Pew Charitable Trs. (April 7, 2020), https://www.pewtrusts.org/en/research-and-analysis/fact-sheets/2020/04/student-loan-default-has-serious-financial-consequences

[12] See Elissa Nadworny, Feds Offer Students New Protections Against Programs That Lead to High Debt, Low Pay, NPR (Sept. 28, 2023, 11:38 AM), https://www.npr.org/2023/09/28/1202291883/for-profit-colleges-student-loans-affordable.

[13] Id.

[14] See Ben Unglesbee, Gainful Employment Reporting Delayed Amid Political Pressures, Higher Ed Dive (Apr. 1, 2024), https://www.highereddive.com/news/gainful-employment-reporting-delayes-education-department/711914/ (explaining that the Biden Administration delayed the data reporting deadline from July 1, 2024 to October 1, 2024 due to the release of the updated FAFSA form); Gainful Employment Rule Take One: Motivation, History, and the Reality of the New Rules, Fed. Rsrv. Bank of Richmond (Mar. 22, 2024), https://www.richmondfed.org/region_communities/regional_data_analysis/surveys/community_college/community_college_insights/2024/gainful_employment_20240322.