Student loan giant Navient reaps backlash from Federal Reserve

Following the economic crisis caused by the coronavirus pandemic, Congress passed the CARES Act, which took the extraordinary step of suspend payments on student loans held by the federal government. The Trump administration then extended the suspension by executive decision until December 31. more than 35 million borrowers that carry federally owned student loans, it leaves the others behind. Borrowers excluded from the suspension of payments include those with private student loans, as well as those with federally guaranteed student loans that are not owned by the federal government.

The CARES law provision “has been a pretty successful intervention for the people it has helped,” said Mike Pierce, policy director of the nonprofit Student Borrower Protection Center. “The challenge here is that he’s left out about eight million people who have federally guaranteed loans, but whose government itself doesn’t own the loan. He also left out the entire private student loan market.

While borrowers with private student loans, who still have to pay regardless of their financial situation, have struggled, private lenders have taken advantage of federal grants. Private student loan companies like CommonBond, Financing of the ascent, Loan Key Technologies, Tuition options, and Ascension credit all took out Paycheck Protection Program loans, according to publicly available data from the Small business management. PPP demands have also been all the rage in the revenue sharing arrangement (a financial arrangement where a borrower agrees to repay the student loan with a fixed share of their future income) and alternative credit spaces. Leif, Vemo, and Mertize all have received PPP loans.

Although Navient did not take out a PPP loan, he received a much more lucrative grant.

Unlike many student loans, PPP loans are canceled if certain conditions are met. In order for their PPP loans to be canceled, employers typically need to retain or rehire their employees and maintain salary levels.

While startups and other small lenders have thrived in the lax regulatory environment of the private student loan market, the largest holders of federally guaranteed but not federally-guaranteed student debt are two good-sized companies: Navient and Nelnet. At Navient first quarter results call, the besieged The CEO of the student loan company, Jack Remondi, insisted Navient would not need a federal bailout. “In terms of government assistance… we think we are in a very strong financial position, both from a balance sheet and cash flow perspective,” Remondi told investors. “We would expect that we would not need any government assistance for this process. Likewise, we did not obtain or use any government assistance during the last financial crisis.

The part about the latest financial crisis isn’t true: student loan companies like Navient (then named Sallie Mae) did it receive a giant bailout through an obscure set of programs hosted by the Treasury Department. And this year, Navient is once again benefiting from federal government assistance.

Although Navient did not take out a PPP loan, it received a much larger grant. Lenders like Navient fund their portfolios by issuing student loan asset-backed securities (SLABS), which are sold to banks and other investors. These securities are eligible for part of the Federal Reserve’s $ 4.5 trillion bailout package, which serves as a bailout for companies like Navient.

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The Term Asset Backed Securities Lending Facility (TALF) allows investors to use Navient’s SLABS as collateral for a low interest rate loan. So far, TALF has loaned against $ 232.6 million from SLABS, according to Data as of August 10 on the Federal Reserve website. Of that total, $ 218 million in SLABS was generated by Navient, with the remaining $ 14.6 million generated by SoFi, another private student loan lender.

TALF primarily bails out equity investors, but in doing so it grants Navient implicit benefits. “The simple announcement of all these different [Federal Reserve] programs has given a good deal of market confidence, ”said Andrew Park, senior policy analyst at Americans for Financial Reform. “That being said, it’s good for Navient because if they do another deal, say next month, they now have a lower funding rate than if their debt was not TALF eligible.”

Navient quarterly results deposits suggest that their student loan practices are under some stress. Navient’s Federal Family Education Loans (FFELs) forbearance rate, or federally guaranteed student loans Navient holds, rose to 26.6% in Q2 2020, from 12.9% a year ago. is one year old. For Navient private education loans, the abstention rate rose to 8.4% in the second quarter, from 2.9% a year ago.

For some advocates, Navient’s inclusion in TALF is a repeat of the federal government’s bailout of student lenders after the 2008 financial crisis.

Navient was the subject of a lawsuit by Pennsylvania Attorney General Josh Shapiro alleging the company misled borrowers about repayment options, pushing them away from lower-cost income-based repayment plans .

For some advocates, Navient’s inclusion in TALF is a repeat of the federal government’s bailout of student lenders after the 2008 financial crisis. passed the Ensuring Continued Access to Student Loans Act, which ordered the Department of Education to purchase $ 100 billion of private student debt. The TALF subsidy is not as massive, but it remains important for Navient.

“Once again, history is repeating itself,” said Pierce. “The economy is in trouble and the Fed has rushed to the aid of big financial interests for the benefit of Jack Remondi, even as millions of Navient customers are being left behind.”

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