Sallie Mae Settles with Department of Justice: Will Other Student Loan Servicers Follow?


NEW YORK (MainStreet) — On the heels of private student loan giant Sallie Mae's settlement with the Justice Department for charging excessive interest rates to military customers, Senator Dick Durbin (D-IL), author of the Student Loan Borrower Bill of Rights Act, asked the nation's student loan servicers to ensure that those in uniform can get the benefits that they have earned and the protections to which they are entitled.


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Durbin has also introduced legislation to fix a provision in the 1940 Servicemembers Civil Relief Act (SCRA), which predates the original GI Bill by four years. That provision unintentionally discourages members of the armed forces from consolidating or refinancing student loans that were taken out before joining the military.

The $60 million settlement with the Justice Department resolves allegations that Sallie Mae charged military customers excessive interest rates on their student loans by improperly seeking loan defaults judgments.

Separately, the Federal Deposit Insurance Corp. announced a settlement of $30 million in restitution from allegations that Sallie Mae maximized consumer late fees. Sallie Mae will also pay $6.6 million in civil penalties.

The Justice Department's lawsuit was the first against a lender and servicer of student loans for violating the rights of military personnel. The settlement has been filed in a federal court in Delaware and is awaiting a judge's approval. Federal officials estimate that some 60,000 service members will be eligible for compensation as part of the settlement.

"We are sending a clear message to all lenders and servicers who would deprive our service members of the basic benefits and protections to which they are entitled," said Attorney General Eric Holder at a news conference this week. "This type of conduct is more than just inappropriate, it is inexcusable. And it will not be tolerated."

The buck may not stop there. Education Secretary Arne Duncan has requested a review of ED's Sallie Mae contracts to see if the Department was overcharged.

The Sallie Mae division that services student loans, now known as Navient, seemed to attribute the problem to errors that were inadvertent.

"We offer our sincere apologies to the servicemen and servicewomen who were affected by our processing errors and thus did not receive the full benefits they deserve," Navient president and CEO John Remondi said in a statement. He said the company has made changes to "prevent these mistakes from happening again." Those changes have not been specified.

Sallie Mae spun off its loan servicing operation on April 30 into a separate company known as the Navient Corporation. Sallie Mae, which will take on consumer banking, and Navient will trade on the Nasdaq exchange as separate companies, most likely by the fall.

With regard to Sallie Mae and student loan abuses, Iowa Democrat Tom Harkin, chair of the Senate Health, Education, Pension and Labor Committee (HELP) said, "While some of these bad actors might think they are too big to fail, I am committed to ensuring that student loan borrowers an no longer too small to ignore.

The Justice Department settlement with Sallie Mae could be a leg up for the Student Loan Borrower Bill of Rights Act that has been championed by Durbin, Harkin and others. It would lead to the establishment of a Servicemember and Veterans Liaison to field questions from members of the U.S. military and veterans about their loan repayment options.

The Act has not become law, however. Senate sources mentioned the possibility that it could be rolled into the Higher Education Act, which is up for reauthorization this year.

--Written by John Sandman for MainStreet

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