Kevin McCoy

USA TODAY

The nation's largest student loan servicer was hit with a Consumer Financial Protection Bureau lawsuit Wednesday over allegations that it has "systematically and illegally" failed borrowers.

Navient, formerly part of Sallie Mae, created repayment obstacles for tens of thousands of student borrowers by providing incorrect payment information, processing payments incorrectly and failing to act when borrowers complained, according to the federal lawsuit filed in the middle district of Pennsylvania.

The company also cheated borrowers out of their rights to lower repayments, according to the CFPB lawsuit, which seeks financial relief for student borrowers who were harmed.

"For years, Navient failed consumers who counted on the company to pay back their student loans," said CFPB Director Richard Cordray. "At every stage of repayment, Navient chose to shortcut and deceive consumers to save on operating costs."

Navient services the loans of more than 12 million borrowers, including more than six million accounts under a contract with the U.S. Department of Education. In all, the company services more than $300 billion in federal and private student loans.

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The CFPB civil action also targets Navient Solutions, a company division responsible for loan servicing, and Pioneer Credit Recovery, a subsidiary that specializes in collections on student loans that fall into default.

"The allegations of the Consumer Financial Protection Bureau are unfounded, and the timing of this lawsuit — midnight action filed on the eve of a new (U.S. presidential) administration — reflects their political motivations," Navient said in a statement issued in response to the legal action.

"Navient welcomes clear and well-designed guidelines that all parties can follow, and we had hoped our extensive engagement with the regulators would achieve this objective," the Delaware-based company said. "Instead, the suit improperly seeks to impose penalties on Navient based on new servicing standards applied retroactively and applied only against one servicer. The regulator-asserted standards are inconsistent with Department of Education regulations, and will harm student-loan borrowers, including through higher defaults."

Student-loan servicing companies manage borrowers' accounts and process their payments. Student borrowers who face financial hardship typically contact servicers like Navient to ask for a modification of the loan terms or seek help enrolling in alternative repayment plans. The servicing companies are often different from the lender.

According to the CFPB, student loans comprise the second-largest U.S. consumer debt market, with consumers collectively owing roughly $1.4 trillion on more than 44 million federal and private loans.

Beginning in 2009, most student borrowers were authorized to make repayments based on their earnings by enrolling in income-driven programs. The plans are part of Obama administration efforts to make student loans more affordable. The resulting federal costs have come under congressional questioning.

According to the CFPB lawsuit, Navient or the subsidiaries allegedly:

Repeatedly misapplied or misallocated students' loan repayments, often making the same error multiple times over a period of months.

Steered troubled borrowers into forbearance, an option that lets them take a short break from making payments. Interest payments on the loans continued to grow during this time.

Failed to adequately inform borrowers enrolled in income-driven repayment programs about critical deadlines and rules for required annual recertification of their earnings and family size.

Deceived private student-loan borrowers about requirements to release a co-signer, such as a parent or other relative, from the loans.

Harmed the credit of disabled borrowers, including injured military veterans, who have the right to seek loan forgiveness of their loans. The company inaccurately notified credit reporting agencies that some of these borrowers had defaulted, the CFPB charged.

Follow USA TODAY reporter Kevin McCoy on Twitter: @kmccoynyc