Navient Settlement Spotlights Overlooked Student Loan Discharges

Navient Corp.'s recent agreement to settle several class actions over improper student debt collection claims strengthens the momentum seized by student borrowers in pursuit of greater relief under bankruptcy law.

Borrowers have won a string of legal victories —along with the backing of enhanced regulatory measures—that punctured a widely held belief that all higher education loans are nearly impossible to eliminate in bankruptcy.

Class action plaintiffs had accused Navient, one of the largest private student loan companies in the country, of continuing to collect on debts that were wiped out in bankruptcy.

Navient’s concessions cover just a small fraction of the roughly $130 billion worth of outstanding loans issued by private lenders. But they are notable because the company had staunchly opposed claims that the debts were dischargeable in bankruptcy or could be brought by a nationwide group of plaintiffs.

The case outcome involving Navient—which boasts an $18.3 billion private education loan portfolio—has opened the door slightly for more student debt relief in bankruptcy. It also comes as federal student loan borrowers grapple with the US Supreme Court’s decision last month overturning the Biden administration’s $430 billion student debt cancellation plan.

“With loan forgiveness dead, filing for bankruptcy is now emerging as one of the only options for many low-income Americans to resolve their student loan debt,” said Jonathan Petts, CEO of debt consultation nonprofit Upsolve.

Raising Awareness

In 2005, Congress changed the description of student loans that can’t be wiped out in bankruptcy absent a showing of “undue hardship.”

The change led to a widespread presumption that student debt couldn’t be discharged in bankruptcy like most other debts, said Boies Schiller Flexner LLP attorney Adam Shaw, who represents plaintiffs in the Navient cases. “It just pervaded the case law and the consciousness.”

In the last five years, several bankruptcy courts and at least three federal appeals courts have found that the bankruptcy code allows the discharge of certain student loans without having to show undue hardship. Private loans for unaccredited higher education programs or those that exceeded the cost of tuition at schools that participate in federal student aid programs can be summarily discharged without burdensome proofs, courts have said.

In 2021, the US Court of Appeals for the Second Circuit ruled that Navient misinterpreted the discharge exemptions in the bankruptcy code. The relevant sections in the code apply to “a far narrower category of debt,” the appeals court said.

The Consumer Financial Protection Bureau has recently amplified efforts to root out lenders’ attempts to collect on discharged student debt. In March, the consumer finance watchdog said it directed many loan servicers to revise their practices and conduct going back several years. The effort has led to refunds to affected borrowers, the agency said.

Heeding a development of court rulings on the subject, the CFPB said in an alert last year that a bankruptcy discharge can summarily wipe out various types of private student loan debt. The agency said it was concerned by consumer complaints about post-bankruptcy collection efforts.

The CFPB enhanced policy guidance on the issue, contacted multiple loan servicers about their treatment of discharged bankruptcy loans, and directed them to take remedial action.

The agency found issues at every servicer it examined and pushed them to change, according to a CFPB senior adviser.

One of the stipulations in Navient’s recent class settlement is ensure it doesn’t collect on certain loans post-bankruptcy in the future. The US Bankruptcy Court for the District of Nebraska approved the accord on June 29.

“We currently abide by all relevant bankruptcy rules and regulations and do not attempt to collect on a debt that has been properly discharged by a US bankruptcy court,” the company said in a statement.

Under the deal, the company agreed to cease efforts nationwide to collect on about $54 million worth of student loans that should have been discharged. It also agreed to pay $28 million in damages for borrowers who continued to pay back those loans after going through bankruptcy.

Another nationwide class is in the process of finalizing a bankruptcy court settlement in New York with Navient related to a separate group of loans, Shaw said. The deal that will provide about $170 million in debt relief, according to Shaw.

Federal vs. Private Loans

Bankruptcy practitioners are starting to shed their “group think” about the “undue hardship” standard, said Dalié Jiménez, a professor at University of California, Irvine School of Law.

They’re now advising consumers that certain private loans that can be discharged in bankruptcy are different from a federal student loan, she said. “They’ve become aware that student loans are not this monolithic category.”

Helping clarify misconceptions around discharging private student loan debt may alleviate stress for several thousand borrowers. But bankruptcy rules still make it onerous to shed federal student loan liabilities, which total more than $1.6 trillion, and account for more than 90% of higher education loans in the country.

Debtors still have to show undue hardship if they want to discharge federal student loan debt and many private loans. That test has earned a reputation for being nearly impossible to pass.

Less than 1% of people who file for bankruptcy with student loan debt even attempt to discharge it, according to a 2020 article in the Duke Law Journal.

Addressing these legal barriers, the departments of Justice and Education last year introduced new guidance to more clearly outline discharge considerations and make it easier for the government to identify cases where discharge is appropriate.

“It’s still early,” but the program “has the potential to move the needle going forward,” Jiménez said. “I actually think a lot of people are in the situation where their federal student loans are an undue hardship.”