The Washington PostDemocracy Dies in Darkness

Education Dept. orders Navient to refund $22.3 million in decade-old student loan scandal

Flags decorate the Education Department in Washington. (Jacquelyn Martin/AP)

Before leaving office, acting education secretary Mitchell Zais ordered Navient, one of the nation’s largest student loan companies, to refund $22.3 million that it allegedly overcharged the Education Department more than a decade ago.

In the early 2000s, the department’s inspector general found several private lenders, including Navient’s former sister company Sallie Mae, overcharged the federal government by tens of millions of dollars.

Investigators recommended in 2013 that the department have Sallie Mae return the estimated $22.3 million owed, but the company denied any wrongdoing. Navient, which assumed Sallie Mae’s liabilities when the companies parted ways, continued to fight the audit and appealed to the Trump administration.

The student loan scandal that just won’t die

Zais, who took over when Education Secretary Betsy DeVos resigned last month, has held the company liable to repay the money.

Navient spokesman Paul Hartwick said the company is assessing its options in the wake of the decision.

“We are disappointed with this ruling because we believe these practices were consistent with Department of Education guidance, which was stated in a letter issued by the Department,” Hartwick said in an email. “The company and other industry participants requested and relied upon that letter to ensure our special allowance payment billing practices were proper.”

The Education Department’s decision stems from a scandal that signaled the beginning of the end of a system that enriched financial firms at the expense of taxpayers.

Before President Barack Obama’s makeover of the student loan system in 2010, the federal government was essentially a silent partner in a $60 billion program. Private lenders used their own money to finance student loans, but behind the scenes, the government paid a portion of the interest to make the debt more affordable.

How the attempt to fix student loans got bogged down by the middlemen

In the 1980s, the government guaranteed lenders a 9.5 percent return on loans financed by tax-exempt bonds. The guarantee became a windfall for lenders when interest rates fell. Congress eliminated the subsidy in 1993, but lenders quickly packaged new loans with old ones to keep getting the payments.

A whistleblower noticed that lenders were shuffling loan financing from one bond to another to increase the volume of loans that qualified for the subsidies. Other officials caught the federal waste, including the department’s inspector general. The watchdog concluded in 2006 that the department overpaid one lender, Nelnet, $278 million from 2003 to 2005. Nelnet disputed the findings and was allowed to keep the money.

In the aftermath of the so-called 9.5 scandal, Democrats began calling for the government to provide only direct federal loans, a move that Obama eventually made when he entered office. To manage its outsize portfolio of loans, the department gave contracts to some former lenders, including Nelnet and Navient, to collect and apply borrower loan payments.

Sen. Elizabeth Warren (D-Mass.) has been a vocal critic of the Education Department’s reliance on companies she says have a sordid history of ripping off taxpayers and harming student loan borrowers. Warren urged DeVos last year to hold Navient accountable for the money owed and has repeatedly called on the department to drop the company as a contractor.

“Navient spent over a decade boosting its profits by cheating students and taxpayers and evading accountability,” Warren said in a statement Monday. “Paying the $22 million it owes taxpayers is a good first step, but now, we need to fire Navient to prevent this corrupt student loan giant from cheating and scamming students and taxpayers ever again.”