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Student loans: Bankruptcy filers get $198 million settlement from Navient

Private student loan borrowers who filed for bankruptcy are finally getting some relief from student loan provider, Navient Corp. (NAVI), to the tune of $198 million.

Navient settled a lawsuit with borrowers who alleged the company illegally collected on private student loans by falsely telling borrowers that their loans were not discharged in bankruptcy. The settlement includes $182 million in debt relief and $16 million cash compensation for impacted borrowers along with help to improve their credit scores as a result of the illegal collections.

The settlement affects borrowers who had private student loans with Navient that were discharged in bankruptcy. Eligible borrowers identified by Navient will receive notices and debt relief will be automatic.

"This settlement provides meaningful relief to thousands of borrowers who were illegally forced to pay back loan amounts that had been properly discharged in bankruptcy," Adam Shaw, counsel for the student loan borrowers and partner at Boies Schiller Flexner LLP, said in a statement. "At a time when our nation is wrestling with questions around student debt forgiveness and abusive lending practices, this agreement establishes once and for all a legitimate bankruptcy pathway for private student borrowers in financial distress."

The lawsuit, which was first filed in 2017, breaks the myth that all student loan debt can’t be discharged in bankruptcy.

While federal student loans are typically exempt from bankruptcy discharge, unless a borrower can show "undue hardship" — a very high standard that has rarely been granted — not all private student loans are exempt from bankruptcy discharge.

Fishers - Circa May 2017: Navient Corporation Indianapolis Location. After the split from Sallie Mae, Navient services and collects on student loans I
Credit: Getty Images (jetcityimage via Getty Images)

"Certain private student loans are protected against bankruptcy discharge. If they are for the cost of attendance, they are qualified as exempt," Shaw said. "But all other private student loans can be discharged."

According to the Consumer Financial Protection Bureau (CFPB), the following private student loans can be discharged in bankruptcy:

  • Loans higher than the cost of attendance paid directly to a consumer.

  • Loans for unaccredited colleges, a school in a foreign country, or unaccredited training and trade certificate programs.

  • Loans made to cover fees and living expenses incurred while studying for the bar exam, medical or dental residency, or other professional exams.

  • Loans to a student attending school less than half-time.

These types of private student loans are treated like other types of unsecured consumer debt, the CFPB said.

Read more: Are federal or private student loans better?

"Collecting on debts that have been discharged through bankruptcy might not only violate the Consumer Financial Protection Act’s prohibition on unfair, deceptive, and abusive practices — it could also violate the order of a United States bankruptcy judge," according to the CFPB.

Private student loan borrowers who had loans discharged in bankruptcy but the lender still collected on that debt can file a complaint with the CFPB.

Ronda is a personal finance senior reporter for Yahoo Finance and attorney with experience in law, insurance, education, and government. Follow her on Twitter @writesronda

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