CHICAGO — For decades, student loan provider Sallie Mae has been slammed by graduates for its lending and collection practices. Now, Illinois Attorney General Lisa Madigan wants Sallie Mae and the company that's taken its place to pay up for "peddling risky and expensive subprime loans ... designed to fail."
On Wednesday Madigan's office filed a lawsuit against Sallie Mae and Navient Corp., which took over Sallie Mae, her office announced in a statement.
"Navient/Sallie Mae treated student loan borrowers unfairly from start to finish," Madigan said.
The federal government also announced charges against Navient Wednesday. About one in four student loan borrowers are serviced through Naviant, according to CNN.
In a statement Wednesday, Navient called the allegations "unfounded." The company said the charges reflect "political motivations" considering the suits were filed as President-elect Donald Trump transitions into the White House.
"Navient welcomes clear and well-designed guidelines that all parties can follow, and we had hoped our extensive engagement with the regulators would achieve this objective. Instead, the suits improperly seek to impose penalties on Navient based on new servicing standards applied retroactively and applied only against one servicer," the statement said.
While the federal lawsuit focuses heavily on repayment rights, the attorney general's lawsuit is a civil suit and covers Navient's "conduct" in originating and servicing loans, along with its debt collection practices, Madigan said at a press conference Wednesday at the Thompson Center, 100 W. Randolph St.
Navient "engaged in aggressive and widespread" subprime lending to originate the loans, and, when borrowers struggled to repay the loans, the company pushed them into "expensive forbearances," which postponed payments without stopping interest rates from climbing, she said. This was done "without counseling them or offering more affordable options," she said.
The company receives government funds to counsel borrowers, Madigan said.
When collecting debt, Sallie Mae "misled" borrowers about the payments, consequences and options to "get their federal loans current through the federal student loan rehabilitation program."
The agency also failed to inform students with disabilities that they could qualify for loan forgiveness.
The abuses affected borrowers of all financial means, she said.
The lawsuit claims Navient/Sallie Mae also targeted students at the "worst schools" and "poorly accredited for-profits" and likened the high-risk, high-interest loans to those given by mortgage lenders that led to the housing crisis in 2008.
Toward the end of the mortgage crisis, Madigan's office began to receive more complaints from student loan borrowers. Most of the borrowers were students at for-profit colleges such as Westwood Colleges, Corinthian Colleges, ITT Technical Institutes and Career Education Colleges, Madigan said at the press conference.
Along with "rampant student loan abuses," Sallie Mae worked with the colleges to target students for the "risky" loans, she said.
"There were absolutely circumstances where Sallie Mae was working hand-in-hand with for-profit schools and other schools in offering and putting students into risky expensive subprime loans," Madigan said. "They were doing that as a means to increase the share of loans they had in the market, and they were doing it also to increase the number of prime rate loans they were able to originate."
The attorney general's suit is seeking restitution for all borrowers affected by the company's allegedly unlawful practices and asks that all contracts or loan agreements between the company and Illinois residents be rescinded or reformed.
“My investigation found Sallie Mae put student borrowers into expensive subprime loans that it knew were going to fail,” Madigan said. “Navient’s actions have led to student borrowers needlessly carrying billions of dollars in debt, and the company must be held accountable.”
Since the loans sometimes required co-signers, grandparents, parents and guardians of the borrowers have also been saddled with the debt, she said.
Federal borrowers through Navient are 31 percent less likely to default than borrowers at other agencies, the company said.
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