By Ben Kaufman and Amber Saddler | January 20, 2022
Most borrowers believe that private student loans are essentially impossible to discharge in bankruptcy. But this isn’t true. Instead, as a report the SBPC released today outlines, this widespread misbelief is the result of a decades-long scheme by the student loan industry aimed at blocking borrowers from accessing their full rights in bankruptcy—all so that these companies could pad their profits.
Our investigation reveals that during the boom-and-bust cycle of exotic private education credit that took place over the last two decades, approximately 2.6 million borrowers took on $50 billion in private student loans that were always presumptively dischargeable in bankruptcy—but industry used every trick in the book to drive struggling borrowers away from their right to relief. These debts represent a burden equal in size to more than a third of the entire private student loan market.
Coming on the heels of a massive, multi-state settlement related to the student loan company Navient’s peddling of “risky and expensive subprime loans that they knew or should have known were likely to default,” our investigation underscores how much work remains to be done to hold the student loan industry accountable for decades of predatory practices. It’s time for the years-long scheme we have uncovered to end, for borrowers to secure their rights under the law, and for law enforcement at all levels to hold the feet of student loan companies like Navient and Sallie Mae to the fire for their crimes.
For Years, Student Loan Companies Lined their Pockets by Lying to Struggling Borrowers
Despite public perceptions, only a subset of private student loans actually face any heightened barriers to discharge in bankruptcy. The remainder—including “direct to consumer” loans, “career training” loans to students at unaccredited schools, bar study loans, and much more—are presumptively dischargeable in the normal course of personal bankruptcy. Just like with credit card debt and personal loans, borrowers facing financial distress on these types of private student loans have a path to relief. The student loan industry pushed many of these products from the mid-2000s through the mid-2010s, and many presumptively dischargeable loans continue to be originated to this day.
Student loan companies know that borrowers can discharge these types of private student loans, but they also know that it could hurt their bottom line if borrowers were to assert their right to be free of these unaffordable debts. And so student loan companies have spent years misleading or outright lying to borrowers about their rights, trying at all costs to extract as much as they could from some of the most financially strapped students in the country. These companies’ tactics have ranged from inserting false statements into borrowers’ contracts claiming that their loans cannot be discharged in bankruptcy all the way to continuing to collect on borrowers who had already been through the bankruptcy process.
In one case, Sallie Mae inserted language into the contract for its generally dischargeable Tuition Answer loan stating “Not Dischargeable: This loan may not be dischargeable in bankruptcy.” Courts have gone on to rule that this assertion was wrong, and that its inclusion in loan contracts did not change borrowers’ right to discharge—but the damage in terms of misleading countless borrowers was already done.
In another instance, Navient continued collecting on a bankrupt borrower, incorrectly claiming that his loans could not be discharged in bankruptcy—all while the company warned its friends on Wall Street that investment vehicles packed with these same kinds of loans did face the risk that borrowers could discharge them in bankruptcy.
The scope of this problem is massive. Based on estimates of the proportion of private student loan debt that has been used for ineligible expenses, the proportion of private student debt that has been used to finance attendance at ineligible schools, and the proportion of private student loan debt owed by ineligible students, we estimate that more than 2.6 million borrowers took on $50 billion in so-called private student loans that can be discharged in bankruptcy just like any other debt.
Industry’s Facade is Beginning to Crack—But Law Enforcement and Legal Practitioners Must Act to Protect Borrowers
As our report outlines, courts have sided with borrowers in case after case to confirm that industry lied. But student loan companies continue their practices. In fact, after losing in court, the CEO of Navient said: “Recently, an appeals court found that, while these loans may in fact be dischargeable, the judge was wrong when he found that the plaintiffs had jurisdiction to bring these claims outside of the bankruptcy court that originally heard their bankruptcy case.” In simple terms, if you don’t live in one of the three circuit court districts where the student loan industry has already been ordered to end its lies, you can expect it to keep coming after you.
It’s long past due for the Consumer Financial Protection Bureau, the Federal Trade Commission, state attorneys general, and state financial regulators to weed out this fraud once and for all. Federal and state law enforcement should use their ability to enjoin and remedy “unfair, deceptive, and abusive acts and practices” at every step in the student loan life cycle as it relates to misrepresentations around loan discharge, and many state attorneys general have additional protections they can enforce under state Borrower Bill of Rights laws. Plus, there is also a key role for private attorneys and legal practitioners to step in to affirm borrowers’ right to bankruptcy.
Finally, the findings of our report should serve as an ominous warning for borrowers, advocates, and law enforcement regarding Navient’s future in the student loan market. Following a well-documented history of failure and abuse as a federal student loan servicer, Navient exited its role as a contractor for the Department of Education in 2021. Now, Navient will continue collecting on the more than $54 billion of federal student loans it owns through the older, bank-based federal student loan program and another $20 billion in private student loans, all while originating new private student loans through its Earnest subsidiary.
Against the backdrop of last week’s settlement with attorneys general in 39 states, our report’s findings make clear that Navient’s conduct in the private student loan market is and has been rife with consumer harm, and that the company’s growing focus on its private student loan portfolio is likely to unleash a new wave of abusive practices. Advocates, law enforcement, and borrowers should all be on watch.
Ben Kaufman is the Head of Investigations and a Senior Policy Advisor at the Student Borrower Protection Center. He joined SBPC from the Consumer Financial Protection Bureau where he worked as a Director’s Financial Analyst on issues related to student lending.
Amber Saddler is Counsel at the Student Borrower Protection Center. A recent graduate of the Howard University School of Law, Amber joined SBPC after completing a fellowship at the Alliance for Justice where she worked on federal judicial nominations and access to justice issues.