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Student-loan case throws down regulatory gauntlet

In this Oct. 6, 2011 photo, Gan Golan, of Los Angeles, dressed as the "Master of Degrees," holds a ball and chain representing his college loan debt, during Occupy DC activities in Washington. As President Obama prepared to announce new measures Wednesday to help ease the burden of student loan debt, new figures painted a demoralizing picture of college costs for students and parents: Average in-state tuition and fees at four-year public colleges rose an additional $631 this fall, or 8.3 percent, compared with a year ago. Image via AP.

Ballooning student debt has been increasingly compared to subprime mortgages. That helps explain why the U.S. Consumer Financial Protection Bureau just ripped a page out of the crisis playbook and accused loan servicer Navient of cheating borrowers paying for college. Suing just 48 hours before Donald Trump is sworn in as the 45th American president is nevertheless a bold gambit by the same agency that nailed Wells Fargo for opening fake accounts.

Student loans have doubled since 2009 to some $1.4 trillion, raising fears they may pose a systemic risk to the economy. Default rates have come down but remain at very high levels. The percentage of students who couldn’t make payments within three years stood at 11.3 percent last year. Some 43 percent of the 22 million Americans with federal student loans also were delinquent.

The CFPB accuses Navient, the former Sallie Mae operation that services $315 billion worth of loans, of defrauding borrowers by giving them bad information and obscuring their ability to take advantage of federal programs that tie repayments to income. It further alleges that the $4.6 billion company steered struggling customers to seek temporary forbearance rather than federal assistance, causing them to rack up $4 billion in extra interest charges.

Banks ultimately paid tens of billions of dollars to settle allegations of mortgage-lending abuses. Navient is taking a tougher approach. It rejected the charges as unfounded and political, noting how the timing of the lawsuit coincides with political regime change. It’s betting on more favorable treatment under the new administration. The CFPB, a Dodd-Frank creation, is disliked by congressional Republicans and the financial-services industry alike. Many are urging Trump to curtail the agency’s powers and replace its director, Richard Cordray.

Whatever he decides, Trump can’t easily sweep away the student-debt problem. The CFPB is joined in its case by the Illinois attorney general, who is also suing Sallie Mae for alleged predatory practices in originating subprime loans. The growth and affordability of student debt have major consequences for the U.S. economy and the aspirations of Americans, as the founder of Trump University knows all too well. For Cordray, he is clearly fighting as much for his agency as for consumers.

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