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Millions in Loan Overpayments?

A new lawsuit charges that the U.S. Education Department has improperly been adding interest and penalties to the student loans of hundreds of thousands of borrowers, if not millions.

The class action was brought by a Washington law firm on behalf of a Minnesota woman who says she discovered the problem after months of dealing with the Education Department. The woman’s loan payment is due on the 21st day of each month, and she paid on time or early. But every June 30, the suit says, the department charged the woman extra interest for not having paid her loan off between the 21st and 30th of that month, and added that extra interest to the total she owed, on which more interest was charged.

Steven Sprenger, a lawyer who specializes in class actions, said that the borrower’s agreement specifically stated that she owed money only on the 21st of the month. While Sprenger said he is not certain how many borrowers were treated in the same way, he predicted that the overpayments to the Education Department may have topped $150 million.

When the borrower reported the problem to the Education Department, Sprenger said she was told that it was an error, but that a computer program couldn’t be fixed so she should just pay extra each June.

Sprenger said that if a private lender engaged in similar treatment of borrowers, it could be facing triple damages and fraud charges. “I would like to think that our government has a greater duty to the students of the country, who pay a lot of money to go to school, and it should be held to the same standards of a commercial lender,” he said.

An Education Department spokeswoman said that the agency had not yet been officially notified of the suit, and so could not comment on it.

In its current form, the suit seeks a class of all people who consolidated direct student loans, a group of more than 2.2 million people. The borrower in question was in a subset of that group — those who consolidated direct loans and were also in an income-contingent program. According to the Education Department, that group consists only of 578,000 borrowers. Sprenger said he had evidence suggesting that the problem went beyond the income-contingent group, but that if that isn’t the case, the suit could be narrowed, while still having considerable funds at stake.

Scott Jaschik

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Comments

income-contingent ?

I can only guess, but what, exactly does the term income-contingent refer to? Having a job? Or not having a job? Or?

Craig C, political pundit at http://blogresponder.blogspot.com, at 10:31 am EDT on March 21, 2007

The Department of Education would do well to clarify the issues here, and soon. Capitalization of interest (which is the actual target of the lawsuit) is an issue in negotiated rulemaking, where the problem is more in FFEL programs (consolidation), where it is allowed as often as quarterly. A claim that the practice would be fraud if committed by a private lender is bizarre, in that current regulations permit it and there is understandable resistance in the FFEL community to changing them, as it is a money-maker for FFEL consolidators.

Puzzled, at 10:46 am EDT on March 21, 2007

Answer to: What is Income Contingent Repayment?

Form the website finaid.org “The Income Contingent Repayment (ICR) plan is designed to make repaying education loans easier for students who intend to pursue jobs with lower salaries, such as careers in public service. It does this by pegging the monthly payments to the borrower’s income, family size, and total amount borrowed. The monthly payment amount is adjusted annually, based on changes in annual income and family size.

Income-contingent repayment is currently available only from the U.S. Department of Education, not from banks or other private institutions making government-guaranteed loans through the Federal Family Education Loan (FFEL) Program.”

Rayne, aelinski@emich.edu, at 12:10 pm EDT on March 21, 2007

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