Navient announced this week it entered a binding letter of intent with the Higher Education Loan Authority of the State of Missouri, or MOHELA, to outsource servicing of privately held student loan portfolios and commercial loans in the Federal Family Education Loan program.
Navient was formed during a split of Sallie Mae a decade ago, and it has serviced both private and federal student loans. MOHELA is one of the largest servicers of federal loans in the United States.
“Navient has entered into a binding letter of intent that will transition its student loan servicing to MOHELA, a leading provider of student loan servicing for government and commercial enterprises,” Navient stated in a press release. “Navient and MOHELA will work toward ensuring a seamless transition in the coming months and providing customers with uninterrupted servicing of their loans.”
The press release said the outsourcing process will begin this year and last 18 to 24 months but that Navient will maintain ownership of the loans. According to Business Insider, the move would affect 2.7 million borrowers.
Navient President and CEO David Yowan said the decision to outsource is intended to “simplify our business, reduce our expense base, and increase our financial and operating flexibility.”
“Over the longer-term, we believe these actions will increase the value shareholders derive from our loan portfolios and the returns we can achieve on business-building investments,” Yowan’s statement continued.
In October, the Department of Education withheld $7.2 million in payment to MOHELA because it did not “meet its basic obligation by failing to send billing statements on time to 2.5 million borrowers.” That failure caused 800,000 borrowers to be delinquent on their loans.
MOHELA was not the only servicer to be punished by the Education Department, which withheld smaller payment amounts from other companies earlier this year.
The criticism of MOHELA came after the return to loan repayment after the government paused it during the coronavirus pandemic and the organization’s servicing of a large portion of the federal government’s direct loan portfolio.
Navient’s selection of MOHELA has come under scrutiny because of its rocky handling of repayment.
Persis Yu, deputy executive director and managing counsel of the Student Borrower Protection Center, told Forbes that “regulators and lawmakers must take the risks posed by this giant firm seriously and immediately supervise the transfer of these accounts from Navient — ensuring that MOHELA’s disastrous, hours-long call wait times, sloppy billing practices, and paperwork backlogs do not lead to the collapse of the student loan system.”
Yu also noted that the move from Navient means the MOHELA has become one of the “largest finance companies in the country.”
The return of loan repayment last fall brought difficulty to the market, which has seen over 30 million student loan borrowers contend with servicing transfers in the last two years before the Navient-MOHELA deal.