UNIDENTIFIED PERSON, BYLINE: NPR.
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DARIUS RAFIEYAN, HOST:
Julie Chinnock is a 50-year-old nurse anesthetist from Ohio. Back in 2017, she decided to get serious about her student debt.
JULIE CHINNOCK: For about 15 years or so, I had been acquiring and paying off my multiple student loans. But I still owed about $250,000.
STACEY VANEK SMITH, HOST:
So Julie consulted with the CPA, and she started getting her finances in order, making a plan to pay back her loans. And so she was gathering up all this paperwork. And...
CHINNOCK: I realized that my loans had been transferred from the original lender and maybe sold, possibly multiple times. It was unclear to me.
VANEK SMITH: Julie called up Navient, which is the student loan company that had been sending her bills every month, and she said, hey, so who actually owns these loans?
CHINNOCK: I asked them for a chain of title or some transfer documents in this case. And they didn't provide it to me, or they couldn't provide it to me. I didn't know.
RAFIEYAN: She made phone calls and left messages and sent e-mails and wrote letters. And all the while, she kept being told, oh, you need to talk to so-and-so in the such-and-such department, or...
VANEK SMITH: So-and-so in the such-and-such department.
RAFIEYAN: Or, you know...
VANEK SMITH: They're never there (laughter).
RAFIEYAN: They're never there. There is no such-and-such department.
VANEK SMITH: It's always voicemail. You always get so-and-so's voicemail (laughter).
RAFIEYAN: Or, you know, she'd run into someone that said, oh, well, I can help you with that. I only handle billing questions. And, you know, on and on and on in a bureaucratic merry-go-round from hell.
CHINNOCK: I was confused. I was like, why do they not just produce the information? So I finally decided, well, maybe I need to ask a court to determine whether or not they own the loans.
VANEK SMITH: This is THE INDICATOR FROM PLANET MONEY. I'm Stacey Vanek Smith.
RAFIEYAN: And I'm Darius Rafieyan. Nearly 45 million Americans have student debt, and many of them know what it's like to be in Julie's situation, being given the runaround by a big, faceless corporation. Today on the show, what happens when one disgruntled borrower decides she's not going to take it anymore and hauls her student loan servicer into court.
VANEK SMITH: Plus, how the search for her missing loans led Julie Chinnock to a multi-billion dollar shadow market lurking just beneath the surface of the student loan industry.
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RAFIEYAN: Why was it important to you to know who was actually holding your loan?
CHINNOCK: Well, I think that that is really one of the biggest issues when you take out a loan, that there's transparency about who you're borrowing the money from, what the terms are. But primarily, it's the principle. I think that I've always kind of been driven by the principle of things, but this is probably the largest thing that I've taken on.
RAFIEYAN: I mean, yeah, she decided to sue this giant, multi-billion dollar corporation.
VANEK SMITH: Yeah. Most of us are just annoyed, but we still send a check. Like, Julie was not doing that. She was not taking this sitting down. She was like, no...
RAFIEYAN: She was going to do something about it.
VANEK SMITH: ...We're pulling - we're using all the legal tools at our disposal.
RAFIEYAN: And so she filed a petition in Ohio State court asking a judge to tell Navient, hey, you got to show proof of ownership on these loans. And she sort of assumed that they would finally produce some kind of promissory note or something and that would be that.
VANEK SMITH: But that was not that. The case turned into this months-long legal battle with her lawyer and Navient's lawyer going back and forth over legal technicalities. The case was transferred to federal court. It was dismissed for jurisdictional issues then refiled in state court then transferred back to federal court. And after nearly two years of depositions and court dates and legal motions, Julie was still no closer to knowing who owned her loans.
CHINNOCK: At some point, you know, you realize you're up against a huge corporation and something that's much larger than just me. So I kind of had to give up.
RAFIEYAN: And so she walked away from the case. She began to accept the fact that maybe she'd never know what happened to her loans.
VANEK SMITH: But then she got a call from Cezary Podkul, a reporter at The Wall Street Journal. And Cezary had been looking into the student loan industry and came across her case, and he said, hey, I think I can help you out. I think I know where at least some of your loans are.
CEZARY PODKUL: Many student borrowers might not know this, but their loans often get repackaged into these securities.
RAFIEYAN: Securities - asset-backed securities.
VANEK SMITH: No. I'm having 2008 flashbacks, Darius.
RAFIEYAN: Well, yeah, it's like the mortgage-backed securities that we heard so much about in 2008. It's thousands of student loans all packaged together into one bond that can then be bought and sold on Wall Street. Instead of mortgages, it's student loans.
VANEK SMITH: And as Cezary was going through the filings from Julie's lawsuit, he realized that some of Julie's loans had ended up in one of these asset-backed securities.
PODKUL: We were able to trace her loans to a particular bond.
VANEK SMITH: That particular bond was called Navient Student Loan Floating Rate Asset-Backed Notes Class A and B.
RAFIEYAN: Snappy name, huh?
VANEK SMITH: (Laughter) I know. Yes. But this bond, lacking though the name may be, is enormous. It contains 11,472 different student loans, including some of Julie's. And as Julie had been making these monthly payments over the years, that money had been going to the investors who had bought the bond.
RAFIEYAN: Was it kind of surreal to find out that there were people on Wall Street, like, trading and betting on your student loans?
CHINNOCK: (Laughter) You know, nothing really surprises me anymore. I guess it was new information for me, and I just wish that they would inform the consumers.
RAFIEYAN: There are more than $170 billion worth of student loan-backed securities out there. I mean, that's a relatively small chunk of the $1.5 trillion of outstanding student debt, but for Navient, it's actually a pretty big part of their business. Almost 90% of all the debt on Navient's balance sheet has been repackaged into some kind of security.
VANEK SMITH: Cezary Podkul of The Wall Street Journal says these student loan bonds are very attractive to investors because they pay pretty good interest rates. And unlike other kinds of debt, most student loans are guaranteed by the federal government, meaning there's comparatively little risk.
PODKUL: So there's interest in that from large institutional investors, you know, probably some of the firms that might manage, you know, some of your retirement assets.
RAFIEYAN: And this massive secondary market serves an important purpose in the student loan industry. Every time Navient sells a loan on Wall Street, it can then take that money and lend it out to the next person, which makes it easier for students to borrow and helps mitigate risk.
VANEK SMITH: But some people worry that allowing Wall Street investors to bet on student loans might create some perverse incentives, that it might lead loan companies to put the needs of bondholders over the needs of borrowers.
RAFIEYAN: For example, when the federal government introduced income-based repayment, which allowed borrowers to tie their monthly payments to how much money they were making, that was great for people like Julie.
PODKUL: It was bad news for bondholders, though, because it meant that a smaller amount of the payments would be coming in each month to actually service these bonds, and what that meant was they were going to take a lot longer to repay.
VANEK SMITH: And if people like Julie take longer to repay their loans, that means the bonds backed by those loans might fall behind on their scheduled payments. And investors do not like falling behind on scheduled payments.
RAFIEYAN: No, they do not.
VANEK SMITH: No.
RAFIEYAN: And so Navient might be incentivized to steer someone like Julie away from income-based repayment and towards a payment plan that is worse for her in the long run but better for bondholders.
VANEK SMITH: And, in fact, in 2017, the Consumer Financial Protection Bureau sued Navient, saying the company had systematically and illegally deceived borrowers about their repayment options.
RAFIEYAN: Now, Navient says that the fact that it issues these asset-backed securities has no impact on how it treats borrowers. They say that the allegations in the CFPB lawsuit are false. They're fighting the lawsuit. But Julie Chinnock says that in her interactions with Navient, she sometimes feels less like a customer and more like the product being sold.
CHINNOCK: Maybe I'm not the consumer that they're really most concerned about. Maybe that's the banks or the individuals who are investing in the securities. But you're right. There is more than one stakeholder. That's for sure. And I hope that something changes at some point in regards to how Navient treats the people who are the borrowers of the student loans.
RAFIEYAN: Meanwhile, Julie is is still making payments on her loans. She expects them to be paid off by 2032, well before any of the bonds backed by her loans come due.
VANEK SMITH: Today's episode of THE INDICATOR was produced by Leena Sanzgiri, fact-checked by Brittany Cronin, edited by Paddy Hirsch. And THE INDICATOR is a production of NPR.
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