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Navient is one of the two largest holders of student debt that is federally guaranteed but not federally owned.
In the wake of the economic crisis brought on by the coronavirus pandemic, Congress passed the CARES Act, which took the extraordinary step of suspending payments on federally held student loans. The Trump administration then extended the suspension by executive action until December 31. But while this relief helps over 35 million borrowers who carry federally owned student loans, it leaves others out. Borrowers excluded from the suspension of payments include those with private student loans, as well as those with federally guaranteed student loans that are not owned by the federal government.
The CARES Act provision “was a pretty successful intervention for the people that it helped,” said Mike Pierce, policy director of the nonprofit Student Borrower Protection Center. “The challenge here is that it left out about eight million people that have loans that are guaranteed by the federal government but where the government itself doesn’t own the loan. It also left out the entire private student loan market.”
While borrowers with private student loans, who still must pay regardless of their financial situation, have struggled, private lenders have taken advantage of federal subsidies. Private student lending companies like CommonBond, Ascent Funding, LendKey Technologies, Tuition Options, and Climb Credit have all taken Paycheck Protection Program loans, according to publicly available data from the Small Business Administration. PPP applications also came fast and furious in the income share agreement (a financial agreement where a borrower agrees to pay back the student loan with a fixed share of their future income) and the alternative credit spaces. Leif, Vemo, and Mertize all received PPP loans.
While Navient didn’t take a PPP loan, it received a much more lucrative subsidy.
Unlike many student loans, PPP loans are forgiven if certain conditions are met. To have their PPP loans forgiven, typically employers must retain or rehire their employees and maintain salary levels.
While startups and other small lenders have thrived in the lax regulatory environment of the private student loan market, the largest holders of federally guaranteed but not federally owned student debt are two good-sized companies: Navient and Nelnet. In Navient’s quarter one earnings call, the embattled student loan company’s CEO Jack Remondi insisted that Navient would not need a federal bailout. “In terms of government assistance … we think we’re in a very strong financial position, from both the balance sheet and cash flow perspective,” Remondi told investors. “We would expect to not need any government assistance through this process. Similarly, we didn’t get or use any government assistance during the last financial crisis.”
The part about the last financial crisis isn’t true: Student loan companies like Navient (at the time named Sallie Mae) did receive a giant bailout through an obscure set of programs housed in the Treasury Department. And this year, Navient is again getting assistance from the federal government.
While Navient didn’t take a PPP loan, it received a much larger subsidy. Lenders like Navient fund their portfolio by issuing student loan asset-backed securities (SLABS), which are sold to banks and other investors. Those securities are eligible for part of the $4.5 trillion Federal Reserve rescue program, which serves as a backdoor bailout of companies like Navient.
The Term Asset-Backed Securities Loan Facility (TALF) allows investors to use Navient’s SLABS as collateral for a low-interest loan. So far, TALF has lent against $232.6 million worth of SLABS, according to August 10 data from the Federal Reserve’s website. Of that total, $218 million in SLABS was originated by Navient, with the remaining $14.6 million being originated by SoFi, another private student loan lender.
TALF primarily bails out the investors of securities, but in doing so it grants implicit benefits to Navient. “The mere announcement of all these different [Federal Reserve] programs has given a good portion of the market confidence,” said Andrew Park, a senior policy analyst with Americans for Financial Reform. “That being said, it’s good for Navient because if they come in with another deal, let’s say next month, they now have a lower rate of financing than if their debt was not TALF-eligible.”
Quarterly earnings filings from Navient suggest that their student lending practices are under some stress. The forbearance rate of Navient’s Federal Family Education Loans (FFEL), or federally backed student loans that Navient owns, increased to 26.6 percent in the second quarter of 2020, from 12.9 percent one year ago. For Navient’s private education loans, the forbearance rate increased to 8.4 percent in the second quarter, from 2.9 percent a year ago.
For some advocates, Navient’s inclusion in TALF is a repeat of the federal government’s bailout of student lenders after the 2008 financial crisis.
Navient was the subject of a lawsuit from Pennsylvania Attorney General Josh Shapiro, alleging that the company misled borrowers about repayment options, steering them away from lower-cost income-based repayment plans.
For some advocates, Navient’s inclusion in TALF is a repeat of the federal government’s bailout of student lenders after the 2008 financial crisis. Concerned about whether lenders would continue to be able to originate loans, Congress passed the Ensuring Continued Access to Student Loans Act, which directed the Department of Education to purchase more than $100 billion of privately held student loan debt. The TALF subsidy isn’t as massive, but it is still significant for Navient.
“Once again history is repeating itself,” said Pierce. “The economy is struggling and the Fed has rushed to the rescue of big financial interests to Jack Remondi’s benefit, even as millions of Navient’s customers are left out in the cold.”
