March 21, 2007

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.

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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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