The U.S. Department of Education has allegedly been overcharging individuals with consolidated student loans by unlawfully capitalizing interest, according to a class-action suit filed Monday.
Capitalizing interest occurs when accrued interest is added to the loan principal, thereby increasing the loan amount.
Steven Sprenger, lead counsel for the suit, said lead plaintiff Brenda K. Pfeiffer, a 1994 graduate of Northwestern College of Chiropractic, discovered several serious irregularities with her student loans.
"She couldn't figure out why she was having interest capitalized and wanted to understand how the capitalization process worked," Sprenger said. "She noticed the numbers didn't add up."
Sprenger said this confusion led Pfeiffer to contact the Department of Education multiple times to seek assistance with her loan's abnormalities.
"This is a simple breach of contract suit," Sprenger said. "You can't sue the government for fraud in this situation. If this were a private lender, they would face more serious allegations. ... [The government] may have been less than transparent about what was going on."
Pfeiffer's loan was granted through the William D. Ford Direct Loan Program, according to Sprenger, in which the Department of Education provides federally funded student loans. This differs from the Federal Family Education Loan Program, through which private vendors provide loans to students.
According to Student Financial Services Director Yvonne Hubbard, the University abandoned the Direct Loan Program in 2004 because federal negligence caused students financial difficulties.
Hubbard also said the University made the switch because the FFEL program was able to provide better rates for students; however, she noted Student Financial Services officials still consider the possibility of switching back to the Direct Loan Program in the future.
Hubbard said, however, she is skeptical that the University will switch back to the Direct Loan Program.
"We expect more out of the federal government," she said.
Hubbard described student loans as a "huge responsibility," adding that preventing potential problems with them demands financial literacy.
"We are trying to empower students to really understand their loans and how they work," Hubbard said.
Hubbard said she Department of Education spokesperson Stephanie Babyak said department officials were unable to comment on the lawsuit because they have not been formally served with the suit.
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