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Nearly eight years ago, I was on a press call with the Consumer Financial Protection Bureau, as it filed a lawsuit against student loan servicer Navient for “systematically and illegally failing borrowers at every stage of repayment.” That suit was filed two presidents ago, in the last week of the Obama administration. And it finally culminated on Thursday, with a groundbreaking order throwing Navient out of the student loan system.
Navient will not be allowed to directly service any student loans, and it can no longer acquire older student loans that are traded in private marketplaces, except under certain contractual requirements. “Today’s action ensures that the company can never creep back into a federal contract,” said CFPB director Rohit Chopra in a press call on Thursday.
But that phrasing—“creep back in”—is important. While at one time it was the servicer for 12 million borrowers, Navient’s primary contracts for servicing student loans ended in 2021, with six million loans transferred to a third party named Maximus. In 2024, Navient transferred what was remaining in its portfolio to the Missouri Higher Education Loan Authority (MOHELA). Thursday’s enforcement action closes the barn door after Navient already left.
MOHELA, of course, was sued just last week by private litigants over allegations that it failed to process loan cancellations that the Department of Education ordered for student borrowers who were defrauded by for-profit colleges. If the shift from a Navient-dominated student loan servicing system to a MOHELA-dominated one had material benefits for borrowers, they’re hard to discern. The core problem appears to be outsourcing what should be a public function into private hands.
Student debt organizers at Debt Collective said this in a statement: “What borrowers today need is a federal government that is proactive and cuts ties with servicers like MOHELA before they surpass the harm Navient caused. Public servants like teachers and firefighters being made worse off due to MOHELA’s errors can’t wait for a seven-year legal challenge to be made whole.”
But that’s what an enforcement-only approach, with its long timelines in the control of the courts and with ample opportunities for delay, is going to look like. Even moving forward to oust MOHELA, as more than 50 lawmakers have called for, may not do the job, unless you think there’s some honest student loan servicer the likes of which we’ve never seen before waiting in the wings. The problem is simply structural: No private company can accomplish the conflicted goals of dealing with borrowers fairly and making a profit. So we shouldn’t have them try.
THE 2010 STUDENT AID AND FISCAL RESPONSIBILITY ACT (SAFRA) transformed student loans to eliminate one set of private-sector middlemen, while establishing another. Before SAFRA, private banks lent to students with a government guarantee, enjoying fees and interest with virtually no risk. After SAFRA, lending reverted back to government Direct Loans. But SAFRA directed the Education Department to contract out loan servicing to private companies that would collect payments, credit accounts, and perform day-to-day operations.
One company was at the center of persuading Congress to mandate private loan servicing. Sallie Mae, formerly a quasi-governmental entity, was privatized in the 2000s and thereafter originated and collected debt on student loans. Sallie Mae’s business model of issuing private loans was dead, until it lobbied for the servicing language in SAFRA, which says that the Education Department can only let the federal government service loans if private servicing is not “practicable” (that is, physically unable to perform the job).
Sallie Mae then became America’s biggest private student loan servicer, eventually spinning off that business into a new company named … Navient. As I put it in 2017, “So a government agency servicing private loans became a private company servicing government loans.”
Which it promptly failed to do properly. But that’s really a failure by design. Student loan servicing, if done correctly, is a low-margin, high-touch, labor-intensive business. It’s just not a moneymaker. Navient’s problems all stemmed from doing things on the cheap to try to turn a profit.
Student loan servicing, if done correctly, is a low-margin, high-touch, labor-intensive business. It’s just not a moneymaker.
That included a primary strategy of steering borrowers into forbearance. While that gives borrowers a temporary respite from payments, interest continues to accumulate and the borrower is blocked from better repayment options. Navient also gave borrowers the wrong information to maintain eligibility for income-driven repayment plans, where borrowers pay a percentage of their income each month for a set time period. At the end of that period, the balance would be forgiven, ending Navient’s servicing. Among Navient’s other errors were misreporting people with total and permanent disabilities who had their loans fully forgiven to credit reporting agencies, as if they were in default.
In all of these and other violations, you can divine Navient’s strategy: hang onto loans, and maintain the per-borrower servicing fee, as long as possible. Lowering labor costs was another imperative: Steering borrowers into forbearance keeps them off the phone as payments are temporarily suspended. But the loan remains active, and the government keeps paying. The servicer’s incentives and the borrower’s interests are simply and structurally at odds.
The litany of fines and enforcement actions over Navient’s conduct reveal the limits of such an approach in a broken market. Navient was fined nearly $100 million in 2014 for overcharging around 78,000 service members. In 2017, CFPB filed its lawsuit. In 2021, the Department of Education clawed back overcharges of $22 million. In 2022, a settlement with 39 states tallied $1.85 billion, in part over forbearance steering. And in 2024, federal and state investigations into forbearance steering led to more than $50 billion in debt relief for more than one million borrowers. These orders were all the result of CFPB’s initial inquiries, and they deserve credit for helping borrowers over the past decade.
Even this week’s order tacks on another $120 million in penalties, $100 million of which will go directly to borrowers. But Navient has been out of the student loan game for three years at this point. While now they cannot go back, the money has already been made and the executives paid. And the order doesn’t touch Navient’s role in the private student loan market, where they own a bunch of loans and have been accused of hiding forgiveness programs from their own borrowers.
In Navient’s place are a new generation of companies like MOHELA that keep getting cited and sanctioned for exactly the same issues. Complaints include record-long wait times for customer service, lost paperwork, incorrect information to borrowers, and now failure to process discharges. None of this is much different from the complaints against Navient a decade ago.
I asked Eric Halperin, CFPB’s assistant director for enforcement, about MOHELA’s position in the student loan servicing market. He explained that CFPB doesn’t comment on nonpublic enforcement activity, but added that “the student loan market is an important priority, and we will be vigilant in looking at any other servicers who have been engaged in any illegal conduct.” I asked if the Bureau was happy with waiting seven-plus years for an order against Navient that came three years after they left the servicing industry. “We don’t control those timelines,” Halperin said, accurately, noting the long road of legal briefing and appeals. “More generally, we have to think about enforcement activities as one piece of the puzzle in regulating and ensuring consumers are getting what they need under the law.”
I sympathize completely with Halperin; he’s an enforcer doing his job within that framework. But if you get enforcers out of government, they understand the problem perfectly. In that 2017 piece I wrote about this Navient lawsuit that was just completed this week, I quoted a then-Roosevelt Institute fellow named Rohit Chopra. “Borrowers that want to pay through a payroll deduction or the tax code would make loan modifications automatic,” he told me. “You wouldn’t need to go through so much red tape to get an affordable repayment program.”
It’s absurd to keep going through this game of hiring private servicers, letting them make money by screwing over their customers, fining them, maybe eventually banning them from the system, and hiring new servicers who go on to do the same thing. This is the twisted logic of privatization in action, which wrongly assumes contractors can deliver services at a lower cost and still make room for their own profit, in ways that aren’t harmful to those directly affected. The student loan system shows this to be an absolute sham; the private sector isn’t a magically efficient solver of problems, it’s a creator of them.
The Treasury Department ran a pilot program on collecting student loans directly in 2014, much like the Department of Agriculture does on its direct loans to farmers. Unfortunately, the pilot was never sustained. The Department of Education could determine that using student loan servicers is not practicable, based on the fact that every servicer ends up breaking the law. But even then, Congress would have to fund the insourcing of direct student debt collection. The administrative burden would be incredibly low—programs that take a percentage of income could be built into tax withholding—but you can definitely envision lobbyists for MOHELA or the next iteration of servicers demanding that Congress not fund it. So it will likely take some political capital to get this done.
It would have been good to do this in 2021, since MOHELA was the only reason opponents of mass student debt relief had standing to sue to block such a program. But the next-best time is tomorrow. The government is indulging a mass crime wave, and putting too heavy a burden on law enforcement to deal with it after the fact. I can write about settlements and enforcement actions against student loan servicers until the end of time, but the real answer is to let the entity making the loans collect the payments.
