CHICAGO (CN) – Student-loan giant Navient and Sallie Mae Bank argued in court Tuesday against a lawsuit accusing them of taking advantage of student borrowers struggling to repay their debts.
Navient and SMB, which both spun out from under the Sallie Mae umbrella in 2014, backed up their motions to dismiss a complaint filed by Illinois Attorney General Lisa Madigan in January during a hearing Tuesday in Cook County Circuit Court.
Similar lawsuits were filed by the federal government and Bob Ferguson, attorney general of Washington state.
Attorneys for Illinois alleged in court that Navient, and Sallie Mae before it, created a scheme of targeting borrowers with poor credit who went to schools with low graduation rates and peddling subprime loans to increase the company’s student loan volume, using them as a “baited hook” to get on preferred federal lender lists.
Michele Casey, assistant attorney general, said Tuesday that Navient went after lower and lower tiers of borrowers trying to get federally backed loans, with one of those tiers having a default rate of 70 percent.
“Borrowers had no awareness of the high default rates these loans had,” she added.
Navient then left students with “no repayment options and no way out,” Casey claimed, saying that when customers called the company looking for help they were steered into forbearance agreements instead of getting a list of options such as repayment plans based on their incomes.
Forbearances give customers a break on loan payments, but interest continues to build up during that time.
According to Madigan’s complaint, Navient also misapplied or misallocated loan payments, deceived borrowers on how to release co-signers, and gave them false information about how repayment plans would affect their credit.
A Kirkland & Ellis LLP attorney representing Navient argued that the state’s claims are all based on the company failing to disclose information to its customers that is not required by law.
Federal regulations under the Higher Education Act and Truth in Lending Act dictate what information loan companies have to disclose to their borrowers, and Navient said it does not have to give them anything beyond that.
“In substance, each of these claims is ultimately predicated on non-disclosure,” its attorney said, adding that “the state cannot pursue these claims.”
SMB’s attorney, Amanda Davidoff with Sullivan & Cromwell LLP, claimed that her client shouldn’t even have been named a defendant in the complaint, as it is a separate entity from Sallie Mae and Navient and merely funded and originated student loans for the other two.
“Sallie Mae Bank was just one of the many originators of loans,” which is not a deceptive activity in itself, Davidoff said.
She also argued that according to the National Bank Act, states cannot require anything of a bank “that is a significant interference to lending,” and deciding on a state-by-state basis what is fair would be a major interference.
Navient services over 12 million borrowers, including over $300 billion in federal and private student loans.
Cook County Circuit Court Judge Kathleen M. Pantle did not set a date for her order on the motions to dismiss, but did grant a motion to stay discovery until she has made her decision.