Following SBPC Findings of an Industry-Wide Plot to Cheat Borrowers Out of Key Protections, CFPB Steps In to Hold Bad Actors Accountable and Make Borrowers Whole
March 16, 2023 | WASHINGTON, D.C. — The Consumer Financial Protection Bureau (CFPB) released a bulletin today demanding student loan servicers halt and return unlawful debt collection on loans discharged through bankruptcy. The announcement stems from the findings of a Student Borrower Protection Center (SBPC) exposé of a years-long scheme by private student loan companies to rob millions of borrowers of their right to file bankruptcy. In total, SBPC estimates this industrywide scheme implicates as much as $50 billion in outstanding private student loan debt.
Preceding this announcement, big banks and other private creditors had for years unlawfully cheated borrowers out of their right to discharge private student loan debt through widespread lies and deceit, including by sending borrowers into collections even after their debts had legally been discharged by an order from a bankruptcy court.
“After years of unfair, deceptive, and shamelessly predatory behavior by some of the largest financial companies in the world, the nation’s top consumer watchdog has finally stepped in to protect student loan borrowers,” said Amber Saddler, Counsel at SBPC. “Now, all eyes are on companies like Navient, which must immediately return the money it stole. The entire student loan industry should take notice—the days of cheating borrowers out of their legal right to bankruptcy are over.”
Major student loan companies, and particularly repeat offenders like Navient, will now face clear consequences for illegally preying on financially vulnerable borrowers whose loans have been discharged in bankruptcy. Navient is currently subject to a nationwide injunction barring the company from collecting on the loans covered by today’s announcement. The CFPB and state law enforcement officials should stand ready to take action against any future violations of the law and to ensure the return of previously collected payments.
Background
In January 2022, SBPC published the results of an investigation uncovering a sweeping, decades-long scheme to cheat more than 2.6 million borrowers owing on roughly $50 billion in private education credit out of their right to bankruptcy.
SBPC’s investigation outlined the audacious tactics that some of the largest players in the private student loan market, such as Sallie Mae and Navient, undertook to convince struggling borrowers and the public that their customers did not have the right to bankruptcy. These tactics included lying to borrowers in advertisements and contracts, sending harassing collections messages to borrowers who had already undergone bankruptcy proceedings, and telling borrowers that loans were not dischargeable. At the same time, student loan companies were straight with Wall Street investors—warning that these same loans could, in fact, be discharged in bankruptcy.
It is a commonly held belief that private student loans in the U.S. are simply not dischargeable in bankruptcy, or that they are dischargeable only after a showing of exceptional financial hardship. Both conceptions are false. Instead, only a specific subset of private student loans referred to under the law as “qualified education loans” generally cannot be discharged in bankruptcy. Loans that do not meet the specific definition of a “qualified education loan” are generally dischargeable through the bankruptcy process just like credit card debt, medical debt, or other personal loans.
Further Reading
Read our investigation exposing student loan companies’ efforts to rob borrowers of their right to bankruptcy: Morally Bankrupt: How the Student Loan Industry Stole a Generation’s Right to Debt Relief
Read a blog post outlining the issue at the heart of our investigation: Not All Student Loans are Non-Dischargeable in Bankruptcy and Creditors Know This
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About Student Borrower Protection Center
The Student Borrower Protection Center (SBPC) is a nonprofit organization focused on eliminating the burden of student debt for millions of Americans. We engage in advocacy, policymaking, and litigation strategy to rein in industry abuses, protect borrowers’ rights, and advance racial and economic justice for all.
Learn more at protectborrowers.org or follow SBPC on Twitter @theSBPC.