Student Loans Scam? Attorney Weighs In

Birmingham, ALIf you’ve had—or have--a student loan, “creative accounting” practices by private institutions may have negatively impacted your financial situation—and you don’t even know it! Attorney Tyler Vail of Hollis, Wright and Couch says this practice is widespread at many private lending institutions nationwide—and may constitute consumer fraud.

You may not even know who is servicing your student loan. “We are finding that third party servicers, such as large banks and private student loan companies are taking advantage of the consumer,” Vail explains. “We are currently investigating these servicers for claims such as excessive and unwarranted late fees.”

Vail says these servicers can also change the status of certain loans. “If you are paying more than the required monthly payment they will reclassify your loan and put it in a pre-paid status,” Vail adds, “and if they put you in a pre-paid status they will no longer send you a monthly bill or statement. Instead they will let the loan sit there accumulating additional interest, without any direction from you.”

This is how it works... Say that I am paying off my student loan at $100 per month, or so I think. The minimum payment that I was told when I took out the original loan was $100. I want the $100 to go toward my loan as planned, as the amortization schedule is understood. But if I choose to pay $250 per month to pay it off faster I expect that additional $150 will go directly to the principal. Here is the problem: the creditors are not doing that.

Instead, that additional $150 is being applied to future minimum $100 payments. Say that I make payments of $250 in January, February and March. I am just paying future interest to the next payments after April. So my loan principle is never going down, it stays the same.

You never get ahead.

“Another issue we are looking into is that the servicers are not following the original amortization schedule that you agreed to when you took out the loan in college,” says Vail. “They are not applying the correct amount to principal. If your original schedule had a certain percentage of your payment going to the principle and a certain percentage going to interest, it appears that they are unilaterally changing the percentages so more goes to interest over time and less to principle.”

It’s a multi-billion dollar industry. Vail says that the average student loan debt for undergrads is almost $30,000. For graduate students the news is much worse. Graduate students may take out $100,000 or more in student loans by the time they finish school. Interest rates vary from as little as 3 percent for government-funded loans up to 11 percent for loans from the private sector. So why go to a private loan company?

As many college students painfully know, you may only quality for $7,500 in tuition for a government loan so you have to go to the private loan sector for any additional education costs over that amount and that is where these issues stem from.

“The government loans carry a very low interest rate, set by the government,” says Vail. “The private sector varies rates considerably based on a number of variables such as the amount of your loan, your credit score, etc.” (The private sector goes largely unregulated.) “The servicers of the student loans can service both government and private loans under the same roof.”

So part of your monthly payment is suppose to go toward your government loan and another part of your payment is suppose to go toward your private loans.

As you can imagine, these private service companies who make their money off of the interest on these loans are the same entities who are controlling the allocation of your monthly payments. In some instances, it appears these companies are allocating more money to the low interest loans, thereby keeping the principle of the high interest loans for as long as they can thereby making more money for themselves and keeping the customer in debt longer than necessary.

Say I have a $5,000 government loan and a $5,000 private loan. Within two years, more of my payments were allocated to the 3 percent government loan while the principle balance of my 11 percent private loan has remained about the same but it is accruing much higher interest. Most individuals don’t have any knowledge of that happening.

And here is another issue, this one going back in time several years…

“When loans are bought and sold in the outside markets, the new purchaser of these loans will usually conduct an “account review” to determine if there were any missed problems with the loans by the prior owner of the loans,” Vail explains. “If they are able to uncover any missed issues or errors by the prior service provider they will come back to you and hold you accountable. Sometimes many years after the issue arose.”

Say you were late on a payment in 2009 and the prior servicer waived the late fee or decided to let it go, the new servicer is coming in and saying we are raising your interest rate because you were late on a payment three years earlier. Now your interest rate will go up, plus they will charge you late fees from 2009.

“Some of our clients have contacted us regarding different issues with their student loans,” Vail adds. “As we began to look into these allegations, we found some interesting accounting procedures taking place by the private loan companies.”

That’s a polite way of putting it. Stay tuned.