Sallie Mae to Pay Nearly $100m for Overcharging US Armed Service Members

WASHINGTON, DC - MAY 13: U.S. Attorney General Eric Holder (R) and Education Secretary Arne Duncan hold a news conference at the Justice Department May 13, 2014 in Washington, DC. Holder announced that the Justice Department has reached a $60 million settlement with Sallie Mae after it was discovered the student load giant charged roughly 60,000 military service members excessive interest rates on their education loans. (Photo by Chip Somodevilla/Getty Images)
U.S. Attorney General Eric Holder (R) and Education Secretary Arne Duncan hold a news conference at the Justice Department announcing a settlement with Sallie Mae for allegedly violating the Servicemembers Civil Relief Act.
Chip Somodevilla/Getty Images

The nation’s largest student loan servicer will pay about $97 million to settle claims that it had made repayment a hassle for student borrowers in the US armed services.

Through three related companies, since 2005 Sallie Mae allegedly violated the Servicemembers Civil Relief Act, which caps interest rates for debts incurred prior to active duty—including those on student loans—for service members at 6 percent. Working together, the Department of Justice, the FDIC, and the Consumer Financial Protection Bureau found that service members were faced with hurdles in trying to claim the benefit. A CFPB report from 2012 found that service members were told to resubmit unnecessary paperwork in applying for the benefit and were not provided with clear information on how to apply for the benefit, which the justice department says resulted in improper default judgments. The FDIC also alleged that Sallie Mae distributed loan repayments from loan servicers in a manner that maximized late fees.

A little bit of corporate-speak: The complaint and settlements, both filed yesterday, targeted three defendants under the Sallie Mae umbrella—Sallie Mae Inc., SLM DE Corporation, and Sallie Mae Bank. At the end of April, Sallie Mae spun off Sallie Mae Inc. and SLM DE Corporation into two companies under the umbrella of a bigger company, called Navient, which will service Sallie Mae’s originated loans and supply federal student loans. Sallie Mae will continue to offer private loans. (That the Navient name is a bit more Bond villain-like was probably an unintended side effect of the switch.) For shorthand purposes, the Department of Justice is referring to all defendants collectively as Sallie Mae.

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Sallie Mae will pay $60 million in its settlement with the Department of Justice, which will be distributed to about 60,000 service member borrowers, as well as a $55,000 fine. It will also pay about $37 million to the FDIC, covering both penalties and further remediation for harmed borrowers.

Under the terms of its settlement with the Department of Justice, Sallie Mae is also required to contact credit bureaus to delete negative entries against affected borrowers, and to streamline the process going forward.

There’s nothing like an alleged wrongdoing against active service members to spur government action. But the claims could reverberate into the wider student loan market, Politico reports.

(U.S. Education Secretary Arne) Duncan also said Tuesday that officials would review whether Sallie Mae, and by extension Navient, violated its contract with the Education Department--which forbids it from breaking the law--in the process. The department said it would renew its contract with Sallie Mae this spring, at least two months after federal investigators discovered the violations.

"Every option is on the table," Duncan said when asked whether the government might terminate its contract with Sallie Mae following the review. Many critics have already called on the department to do so.

In addition, Duncan said, the department?s Federal Student Aid office would review whether loan servicers across the board--not just Navient--are complying with the law.

Navient and Sallie Mae deny wrongdoing and say the government has shifted from previous regulatory requirements, resulting in the penalty. As the Huffington Post reports, that argument might be a fair one.

A June 2011 letter from the Education Department to Washington trade groups representing student loan companies helps to illustrate Navient's position.

Service members wishing to have the interest-rate cap applied to their loans had to provide a copy of their military orders when requesting the benefit. But in the letter, which served as a response to questions from the industry over how best to comply with the service members law, Pamela Moran of the department's Office of Postsecondary Education made clear that service members had to provide the end dates of their active-duty tours when requesting benefits, and that they had to specifically ask for the interest-rate benefit. Vague requests needn't be honored.

The Huffington Post asked the Education Department whether it had consulted with the Defense or Justice departments in drafting the June 2011 letter, and whether the department intended to disqualify officers, whose orders typically don't have end dates. The Education Department did not respond to multiple requests for comment, nor did it confirm the authenticity of Moran's letter.