With student loan debt totaling about $1.3 trillion and continuing to mount, Illinois and the federal government are going after allegedly abusive lending practices they say trap consumers and make it difficult for them to move past their school years.
It's debt that could wreck credit scores, and it's similar to a problem Illinois Attorney General Lisa Madigan has been fighting for years.
Many of the subprime student loans in question were designed to fail, she alleges, just like the subprime mortgages she investigated that were at the heart of the 2008 financial crisis and Great Recession.
"The mortgage lenders had an economic incentive to get into these bad subprime loans and it's the same thing," Madigan said. "(Student loan lenders) wanted to increase their market share, so they were willing to originate loans they knew students would never be able to pay back."
The state's lawsuit, filed by Madigan on Wednesday in Cook County Circuit Court, alleges student loan servicer Navient and its subsidiaries failed to properly assist borrowers struggling with loans.
The Consumer Financial Protection Bureau filed a similar complaint against Navient on Wednesday.
Illinois' suit, however, also alleges loan originator Sallie Mae Bank put students into expensive subprime loans it knew were going to fail, violating the Illinois Consumer Fraud Act. The suit filed by Madigan asks the court to provide restitution to borrowers, and to rescind or change contracts or loan agreements between Navient and Illinois consumers.
Navient, based in Wilmington, Del., said the allegations in both lawsuits were unfounded.
In a news release, Sallie Mae noted its operations separated from Navient in 2014. "Navient has accepted responsibility for all costs, expenses, losses and remediation arising from this matter," according to the statement.
The lawsuits highlight growing worries that college graduates — and even those who don't leave with a diploma — are weighed down by school bills that put big expenses like buying a car, homeownership and even children — out of reach. In 2016, college graduates left campus with an average of more than $37,000 in student loan debt, according to an analysis by higher education expert Mark Kantrowitz.
Navient's alleged practices potentially affected millions nationally with private loans as well as federally backed Stafford loans, according to the attorney general's office.
Navient contracts with the Department of Education to manage federal student loans. Navient's subsidiaries Navient Solutions, Pioneer Credit Recovery and General Revenue Corp. also were named in the state suit.
That contract requires Navient to help borrowers evaluate repayment options, but the company failed to assist those who were struggling, Madigan charged. Instead of telling them about income-based repayment plans on federally backed loans, the company steered them into forbearances that increased the overall cost of their loan, according to the suit.
A forbearance allows borrowers to delay or postpone loan payments without defaulting, but interest on the loans continues to accrue.
Students and recent graduates are looking for the quickest solution to loan issues and that can get them into trouble, said Maria Morales, associate director in the financial aid office at the University of Illinois at Chicago.
"Students just want the easiest thing," she said. "They're like, 'One less bill, great.'"
UIC will work with students to help them better understand loans if they ask, but also encourages them to contact their loan servicer if they're struggling, she said.
Asfa Hasan, a 20-year-old junior majoring in finance at UIC, exemplifies how confusing the industry can be to students still working on their education.
Hasan said she turns to Google's search function for most of her loan-related questions. She took out federal student loans, and though the idea of paying them back seems daunting, she trusts that the government's payback plan will be manageable.
"It's the government. It should be OK," she said. "It's not like a private loan where I would be held accountable all on my own."
Complaints to the attorney general's office about higher education have been on the upswing since about 2012, and last year totaled about 1,500, Madigan said. Most were about student loans.
Once student loans were in default, Navient and its subsidiary debt collection companies engaged in deceptive collection practices, the Illinois suit claims. Those practices included failing to send proper notice to borrowers who had to complete annual forms, misallocating loan payments and failing to fix recurring errors on borrowers accounts, among other allegations.
"We will vigorously defend against these false allegations and continue to help our customers achieve financial success," the company said in a news release.
Now a publicly traded company that originates private student loans, Sallie Mae was created by Congress in 1972 to support a student loan program. It worked its way onto school's preferred lender lists, offering loan packages to students at schools, according to the Illinois suit.
For years, the suit charges, Sallie Mae originated loans with high interest rates and fees, mostly for students at for-profit schools, disregarding evidence that many of those loans would default.
"It's going to have a financial impact on them for the rest of their lives because their credit is going to be a mess," Madigan said.
One student who attended Chicago culinary school Le Cordon Bleu in 2006 said in a letter to the attorney general's office that she experienced the bite of a $12,500 loan she took out from Sallie Mae to help pay for school.
A financial aid representative at the school directed her to Sallie Mae's site before even discussing details of the school's program, she wrote in the 2014 letter, which is quoted in the complaint. The loan had an interest rate of more than 17 percent, and she struggled to make payments after graduation.
Schaumburg-based Career Education owns the U.S. arm of the Le Cordon Bleu chain, and was one of the schools that listed Sallie Mae as a preferred lender, according to the complaint. Career Education announced in December 2015 that it planned to close Le Cordon Bleu's 16 U.S. campuses.
In her letter to the attorney general's office, the unnamed student accepted responsibility for taking out the loan but voiced her frustration at the system.
"Your constituents are drowning in student loan debt," she wrote.
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