In a case that could offer relief to thousands of debtors struggling to repay their student loans, Jones Swanson has joined with five other law firms to bring a national class action lawsuit against America’s biggest student loan servicer, Navient.

The suit, Evan Brian Haas, Michael Shahbazi, et al. v. Navient Solutions, LLC and Navient Credit Finance Corporation, alleges that Navient has “engaged in a massive effort to defraud student debtors” across the country by misrepresenting whether their loans can be “discharged,” or erased, in bankruptcy.

“Many students hope to rely on Navient for advice about their loans,” said Lynn Swanson, Jones Swanson’s lead attorney on the case. “They don’t expect Navient to mislead them, or to conceal information from them.”

Jones Swanson’s co-counsel in the case are New Orleans-based Fishman Haygood, as well as New York-based Austin Smith, Chicago-based Joshua Kons, Houston-based Adam Corral and Houston-based Marc Myers. On May 11, the firms were appointed interim class counsel and interim lead counsel for absent class members. The New York-based firm Boies Schiller Flexner is also co-counsel on behalf of the proposed class in the case.

Click here to see a timeline of key documents pertaining to the Navient class action lawsuit.

Student loans and bankruptcy

Two sections of the US Bankruptcy Code are at the heart of the case.

In 1978, Congress enacted section 523(a)(8) of the Bankruptcy Code to prohibit most student loan holders from erasing their federal student loans in bankruptcy proceedings.

In 2005, after heavy lobbying from private lenders and debt collectors, Congress enacted section 523(a)(8)(B) of the Code so that not only federal educational loans, but also private educational loans would be exempt from being erased in bankruptcy—as long as those loans met certain criteria:

  • The loans must be made to eligible, full-time students.
  • The students must be attending Title IV-accredited schools.
  • The loans must be made for tuition, room, board and educational materials.

However, as Jones Swanson and its co-counsel have argued, Navient often ignores these criteria, and tells student borrowers that they cannot legally erase their student debt in bankruptcy, even when they can. Thus, the firms allege, all across the country, thousands of student debtors who have already declared bankruptcy are paying back student loans that they might have erased in court if Navient had not misled them about the law.

These are the student borrowers that Jones Swanson and co-counsel represent in their class action suit. If the suit prevails, these borrowers will not have to pay back some or all of their student loan debts. In some cases, they may even get back money from Navient.

Navient’s bumpy regulatory history

Navient was created in 2014, when the nation’s largest provider of student loans, Sallie Mae, split into two entities.

One entity, still known as Sallie Mae, now functions mainly as a bank that offers private educational loans and other financial products to college students and their families. The other entity, Navient, focuses on servicing student loans, both federal and private. It also securitizes its loans—packaging them and selling them to investors—in the same way that banks have securitized home mortgages.

Today, Navient collects payments for more than $300 billion worth of student loans from about 12 million current and former students—more than one out of every four student borrowers across the country.

Since its inception, the loan servicing company has been constantly in trouble with federal and state authorities:

  • In February 2015, the US Department of Education announced that it would end its contract with Pioneer Credit Recovery, a wholly-owned subsidiary of Navient, after finding that it had “made materially inaccurate representations to borrowers” about whether they qualified for loan rehabilitation programs and “the waiver of certain collection fees.”

But it was in January 2017 that Navient faced the most serious allegations, in lawsuits brought against it simultaneously by the State of Illinois, the State of Washington, and the CFPB.

The Illinois and Washington lawsuits claim that Navient’s predecessor, Sallie Mae, peddled to students “predatory loans” that were “designed to fail.” They also allege that Navient used “unfair or deceptive practices” to make those loans more difficult for student borrowers to pay off.

The CFPB, meanwhile, alleges that Navient “systematically and illegally failed borrowers at every stage of repayment,” that it used “deception to illegally cheat struggling borrowers out of their rights to lower payments,” and that it “illegally steer[ed] vulnerable borrowers toward options that may cost more.”

The CFPB suit also alleges that Navient harmed thousands of borrowers who were “totally and permanently disabled”—including veterans disabled during military service—“by making it appear as if those borrowers had defaulted on their student loans when they had not.”

Navient’s blunt response to these allegations surprised even its critics.

Although its marketing materials make extravagant claims about “guiding customers along the path to financial success” and “customer-centricity,” Navient’s legal filings argue that “There is no expectation that the servicer will ‘act in the interest of the consumer.’”

A new legal angle

The class action case brought by Jones Swanson and co-counsel has its roots in a research project that one of the case’s lawyers, Austin Smith, began when he himself was in law school, in 2014, at the University of Maine.

“I used to work in a coffee shop in the mornings,” Mr. Smith said, “and I befriended this retired litigator who would come there to read the paper. I told him I needed a topic for my law review note, and he suggested I write about student loans in bankruptcy.  At first I thought that sounded sort of boring, but he persuaded me to look at the materials, and I decided there might be something to dig into.”

Indeed, Mr. Smith has been digging into the subject ever since then. He started with an article in the American Bankruptcy Institute newsletter. Then, in March 2016, he argued his interpretation of how the Bankruptcy Code applied to private student loans in a lawsuit—and won it. Since then, he’s won nine more cases in New York, Texas, Minnesota, California and Connecticut, before joining late last year with other firms in New York, Chicago, Texas and Louisiana to bring Haas, et al. v. Navient Solutions, LLC, et al.

In this case, Mr. Smith says, Navient itself has actually helped frame up the argument against it, by making one claim about the Bankruptcy Code to student borrowers, and an entirely different claim about it to the company’s own investors.

“The problem for Navient was that they had been telling consumers for years that all student loans were non-dischargeable,” Mr. Smith explained. “But if they told that same story to their investors, the investors’ lawyers would read the actual law and quickly see that was not true, and then they could sue Navient for securities fraud. So Navient decided they would tell their investors and the SEC the truth, and just hope that most debtors wouldn’t be digging through SEC filings to learn the real story. And for ten years, they got away with it.”

For example, collectors for Navient advised both Evan Haas and Michael Shahbazi that their career training loans were “not dischargeable in bankruptcy.” But in a 2014 offering memorandum, Navient advised potential investors that career training loans “are generally dischargeable by a borrower in bankruptcy,” and so could put investors at risk of a loss.

Mr. Haas and Mr. Shahbazi are now the lead plaintiffs in the national class action lawsuit that Mr. Smith, Ms. Swanson, and their co-counsel have filed against Navient.

A case update

In March, plaintiffs in the Haas case got some good news when, in response to their filings, Navient agreed to cease contacting potential plaintiffs in the case about their loan repayments, except by sending them monthly statements. As a result, Jones Swanson and co-counsel estimate that about 16,000 student debtors have stopped receiving what many describe as constant, harassing phone calls from Navient.

Navient has also agreed in court to provide plaintiffs’ counsel with a list of names and contact information for Navient debtors with private loans who have declared bankruptcy since October 2005. But according to attorney Lynn Swanson, Navient hasn’t exactly delivered on that part of the agreement.

“Most of the contacts on the list they sent us were wrong in one way or another,” Ms. Swanson said. “It seems odd that Navient has been able to contact one of our potential class representatives at his correct address, but the contact information for that representative was incorrect on the list Navient provided to us in the lawsuit.”