One More Travesty in the Student Loan Program

(Sipa via AP Images)

Navient is one of the main federal contractors servicing government-owned student loans, and taxpayers pay more than $100 million each year to Navient for its services. It is also the nation's largest holder of federally guaranteed student loans. The federally guaranteed loan program was discontinued about ten years ago, but Navient still holds about $80 billion of these loans.

One would hope that Navient would be investing in its company to ensure that borrowers are well served and tax dollars are well spent. Instead, it seems that the company has been investing its resources in a very different way: buying back stock from its shareholders to artificially inflate share prices and turn a profit.

A recent report from the Roosevelt Institute and the National Employment Law Project, “Curbing Stock Buybacks,” details how “stock buybacks”—the practice of companies repurchasing their own stock from shareholders to artificially increase stock value—enrich corporate executives and speculative shareholders while hurting America’s workers and long-term economic growth. Repurchasing stock has a variety of attractive outcomes for companies: increasing the scarcity of shares and boosting their value, enriching CEOs and shareholders by allowing them to sell stock at inflated prices, and making the company look more attractive to investors. But the results for everyone else are far less desirable: diverting funds that could have been put toward innovation, jobs, worker compensation, and capital investments, while distorting stock prices.

Navient is an extreme case of share repurchases. Between 2014 and 2017, the company spent $2.75 billion on stock buybacks—a jarring figure that amounts to nearly 90 percent of Navient’s profits over that time period. But Navient isn’t like other businesses engaging in buyback programs—its business model and profitability is built around student loan borrowers and, as a contractor, it relies on government student loan programs.

By using profits to enrich CEOs and shareholders, Navient has fewer corporate resources available to make much-needed improvements to its business practices—such as expanding staff to advance borrower outreach, doing research that helps Navient better understand how to assist struggling borrowers, or even offering more generous terms to borrowers.

Navient could have used the $2.75 billion to directly relieve the burden on borrowers trapped under debt; there is no reason why Navient couldn’t use its excess cash to provide rate discounts or partial cancellation on the $23 billion in private student loans that it holds, or offer better interest rates on its new loan-refinancing program.

One probable explanation why Navient President and CEO Jack Remondi is eager to direct corporate profit toward share repurchases instead of long-term investment in his company is his personal financial interest. Navient’s CEO earned nearly half of his compensation in shares—in 2017, he earned $6.5 million in total compensation, and $3 million of that was in stock rewards. CEOs can (and do) sell their personal stock holdings after authorizing share repurchases when the shares are trading at artificially inflated share prices—a clear conflict of interest. Commissioner Robert Jackson of the Securities and Exchange Commission (SEC) recently reported that in half of the buybacks that his team studied, at least one executive sold shares within a month.

Navient might argue that it is adequately investing in its business and providing buybacks to its shareholders, but the evidence suggests this is not the case. Navient currently faces lawsuits from the federal Consumer Financial Protection Bureau (CFPB) and four state attorneys general, all alleging that Navient provided inadequate—even deceptive—advice to borrowers about their repayment options, in an effort to cut corners and save money. Further, Navient has the lowest customer service rating of all of the federal student loan servicers in the United States.

While the company quietly funnels billions to repurchase shares, Navient suggests that the government should be the one improving outcomes for borrowers. For example, in its motion to dismiss the CFPB’s lawsuit, Navient argues that any “costly” improvements in its advice to borrowers about income-based repayment would require a price adjustment to compensate the company. Also, in testimony to a congressional task force, CEO Remondi recommended that the government find ways to increase borrower contact with servicers and promote more informed choices—two things that Navient could do itself if lax rules and regulations didn’t encourage the practice of stock buybacks over investing its own resources into shared, productive outcomes.

As a publicly traded company, Navient has a responsibility to its shareholders. But as a federal contractor, Navient also has a responsibility to student loan borrowers and American taxpayers. Satisfying all of these stakeholders is a balancing act, but stock buybacks give Navient a strong incentive to reward speculative shareholders at the expense of everyone else. Taxpayers and students need Navient to invest in a long-term strategy that promotes the best outcomes for those who are trapped under debt. The federal government has no business investing taxpayer money in a company that squeezes those at the bottom of our economy to line the pockets of those at the top.

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