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Pennsylvania AG files lawsuit against Navient over student loan practices

[JURIST] Pennsylvania Attorney General Josh Shapiro [official website] filed a lawsuit [complaint, PDF] Thursday in the Middle District of Pennsylvania against Navient Corporation [corporate website] over unlawful student loan origination and servicing practices.

The lawsuit alleges that Navient violated Pennsylvania's Unfair Trade Practices and Consumer Protection Law and the Consumer Financial Protection Law. These allegations include "peddling risky and expensive subprime loans that they knew or should have known were likely to default" and "while servicing student loans, failing to perform core servicing duties, thereby causing harm to borrowers and cosigners."

Navient is accused of providing student loans with interest rates as high as 15.75 percent with an additional origination fee of 9percent that was added to the balance of the student loans. They are also accused of lowering their credit standards to lend expensive loans to those who could not afford it. In 2001, Navient had three qualifying credit tiers. In subsequent years, they added an additional three lower credit tiers. They also lent to students attending schools with graduation rates less than 50 percent Navient also protected itself from some defaults by using techniques to have the schools take some of the risk of defaults.

Navient is also accused of pushing borrowers to enroll in forbearance instead of income-driven repayment (IDR) programs. Forbearance is supposed to be meant for borrowers experiencing short-term financial difficulties, but Navient is accused of pushing borrowers in long term financial hardships to sign up for forbearance. This allowed interest to continue to accrue while payments were not being made.

Customer service representatives were compensated for having lower call times. However, IDR can be a lengthy process which would involve multiple long calls and paperwork. Far more borrowers were enrolled in forbearance than the IDR programs. Between January 1, 2010 and March 31, 2015, 1.5 million borrowers were enrolled in forbearance programs that exceed 12 months in length.

Shapiro is seeking full restitution to all borrowers affected by Navient's unlawful practices, disgorgement by Navient of unlawfully gained profits, and civil penalties. Shapiro is also seeking to have all contracts or loan agreements between Navient and Pennsylvania customers to be rescinded or reformed. The lawsuit also seeks to stop Navient from collecting on all illegal loans.

This is not the first lawsuit against Navient regarding their student loan practices. In January the Consumer Financial Protection Board also sued [JURIST report] Navient for "fail[ing] borrowers at every stage of repayment."

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