Navient, your student loan servicer, is under pressure from an activist hedge fund. Is that good or bad for borrowers?

Navient, the nation’s third-largest student-loan servicer, has been ripped for its customer service and is fighting lawsuits from the U.S. government, schoolteachers, and multiple state attorneys general who say the Wilmington-based company has routinely mistreated customers.

Now Navient is contending with critics on a new front: shareholders.

Noting that the company’s performance has lagged the stock market, activist hedge fund Canyon Partners last year offered to buy Navient and take it private. Navient refused, and Canyon threatened a proxy battle, building up a stake of about 10 percent of the company’s shares.

Instead, the two sides agreed last month to a cease-fire and jointly nominated two new directors. Navient’s board slate is expected to be approved at its annual meeting June 6.

The maneuvering raises many questions, among them: Will Navient change? And how will borrowers fare?

One clue comes from Navient CEO John “Jack” Remondi, who asserted during the public battle that Canyon’s approach would likely lead to lower servicing quality, more delinquencies and defaults, and more intense regulatory scrutiny.

Under Remondi, Navient expanded into collections of local and state government tax receipts, health-care bills, and other consumer debts.

But Canyon wants Navient to quit making costly acquisitions that perform poorly and to stick with student loans, which it accuses the company of neglecting.

Buying new businesses and ventures to fund “what we regard as bloated overhead and unacceptable operating losses in some of those businesses" is a poor strategy, Canyon says in filings with regulators. In addition, Navient should have settled legal claims instead of allowing the suits to “cast a shadow” over the stock, Canyon said.

Navient ranks just after FedLoan and the merged Great Lakes-Nelnet as the largest student-loan servicers in the United States. But Navient is a publicly traded company, while FedLoan is run by state-sponsored PHEAA, the Pennsylvania Higher Education Assistance Agency. Together those two service 47 percent of the nation’s $1.5 trillion in student loans. (Most student borrowers know them on statements as Navient and FedLoan.)

Navient’s customer-service ratings have been mixed. LendEDU, an online marketplace for student loans and other financial products, analyzed borrowers’ complaints and found that Navient had the worst record, with 2,239 complaints in 2018. Still, that represented a 64 percent drop in complaints from 6,274 the prior year.

Plus, Navient serves two different masters: student borrowers and public shareholders.

On the one hand, Navient’s mission is to service increasingly complex student loans, and much of its massive portfolio is backed by the U.S. government. Servicers have complained they aren’t paid enough by the feds to adequately help borrowers.

At the same time, Navient has come under pressure from Canyon and other Wall Street investors to spend hundreds of millions of dollars purchasing its own stock, rather than spending on acquisitions, technology, or better customer service.

Navient’s stock price has languished under Remondi’s leadership. After it spun off from student-loan lender Sallie Mae in 2014, Navient’s stock price has dropped 14 percent, while the S&P 500 has gained 67 percent.

Navient’s strategy has changed on the margins since the fight began with Canyon. Navient began buying back shares earlier than planned — $386 million in 2018 and $146 million in the first quarter of 2019.

Remondi on earnings calls repeatedly contends that “our stock price trades below intrinsic value” in the low $20s. And he admitted that regulatory issues also “weigh heavily” on the share price.

Attorneys general in Pennsylvania, Illinois, Washington, California, and Mississippi and the federal Consumer Financial Protection Bureau have sued Navient alleging widespread deceptive practices and predatory conduct. The suits allege that Navient pushed borrowers into short-term plans that postpone their required payments instead of helping them enroll in plans that cap payments based on income. The practices drive the overall cost of the loans up for student borrowers, the states allege.

Even Liar’s Poker author Michael Lewis recently highlighted Navient’s horrifying call-center practices in a podcast, called “The Seven Minute Rule,” in which its customer-service reps couldn’t spend more than seven minutes servicing a student borrower, or risk being penalized.

Canyon, considered a savvy distressed company investor, and another fund proposed to buy Navient at $12.50 a share last year, but Navient’s board in February rejected the $3.2 billion offer, saying it was lower than the $14-to-$15 range discussed. The stock closed Thursday at $13.19. (down 0.30 percent).

Canyon has pounded away at Navient’s “dismal” stock performance over the last five years.

Responding in April, Remondi insisted, “There is a significant difference between running a highly regulated, customer-focused service business and Canyon’s strategy of managing the student loan portfolio strictly as a runoff portfolio. We believe Canyon’s approach is likely to lead to reduced servicing quality, higher delinquencies and defaults, lower cash flow, and more intense regulatory scrutiny.”

None of Canyon’s four nominees made it to the board of directors slate, but Canyon and Navient did agree to nominate Marjorie Bowen and Larry Klane. Bowen is a former investment banker and Klane is a financial technology investor and former banking executive. Management consultant Linda Mills becomes the chair of the board.

Under the cease-fire agreement, Canyon agreed to vote in favor of the slate nominated by Navient and call off its proxy war.

“We can now return our full focus to building on our strong first-quarter result," Remondi said in a statement.

Analysts point to Navient’s high operating expenses, at roughly $230 million a year, at a time when the company’s loan business is shrinking. To counter that, Navient bought Earnest, a start-up student-loan servicing company, a familiar sector.

“When they bought Earnest, it wasn’t a good acquisition” because it added more employees and expenses, said Moshe Orenbuch, equity analyst with Credit Suisse in New York. “Anything that causes them to be bigger in their expense base is a bad move.”

It’s also possible if Canyon wins a bid to cut costs, that could affect jobs at Navient. With thousands of employees in Wilmington and Wilkes-Barre, Navient earned $395 million in 2018 and $65 million in the first quarter of 2019.

Navient CEO Remondi, meanwhile, has profited handsomely.

In 2018, he was paid $6.9 million in total compensation, $6.4 million in 2017, $6.5 million in 2016, and $3 million in 2015. Over that same period, Navient’s share price dropped sharply.

“Remondi had an entrenched board who did whatever he said, and he can get away with a lot,” said another equity analyst, who asked not to be identified.

Based on its peer group of 16 public companies, Navient ranked 14 out of 16 on a net-income basis and 16 out of 16 on a market-capitalization basis.

Remondi often flew a corporate jet between Navient offices in Delaware and Virginia and his three homes in Massachusetts and Florida.

He and his wife live outside Boston, in the tony Needham suburb, in a $2.5 million home. They summer in Falmouth, Mass., on Cape Cod, in a $2.7 million home, and own a $4 million home in Naples, Fla., purchased in 2015.

Canyon Capital isn’t the only hedge fund building up a stake. Barrow Hanley along with the mutual fund giant Vanguard and BlackRock each own roughly 10 percent of Navient.

Wall Street veteran Leon Cooperman of Omega Advisors expressed the hope and frustration of many Navient investors. He helped take Navient’s predecessor Sallie Mae public in the 1980s.

“A few years ago, I was an investor, because they do a lot for society, but the government was beating the hell out of them,” he said in an interview. He sold, but then started buying shares again last year after Canyon’s $12.50 bid. Cooperman now owns close to 500,000 shares.

“We think it’s worth somewhere in the $30s,” he said.

In the meantime, Navient continues to navigate two very different constituencies: borrowers and shareholders.