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The lawsuit alleges that the Department systematically and unlawfully capitalizes interest that accrues on consolidated student loans between the borrower’s June payment date and June 30th. There are more than three million consolidated student loan borrowers with aggregate debt obligations in excess of $72 billion. The government’s practice directly contravenes the student loan documents and costs the borrowers, in the aggregate, millions of dollars each year.
The plaintiff is seeking injunctive relief and a return of all monies owed as a result of the Department of Education’s actions.
The plaintiff, Dr. Brenda Kay Pfeiffer, is a Minnesota resident who had taken out multiple Stafford, SLS and Perkins loans from the Department of Education prior to her graduation from chiropractic school in 1994. In 1997, Dr. Pfeiffer consolidated her loans under the William D. Ford Program and executed a form Federal Direct Consolidation Loan Promissory Note in favor of the Department of Education. The note provided for a variable rate of interest and stated:
Interest
Except for interest [the Department of Education] does not charge me during an in-school, grace or deferment period, I agree to pay interest on the principal amount of my Direct Consolidation Loan from the date of disbursement until the loan is paid in full or discharged. [The Department of Education] may add interest that accrues but is not paid when due to the unpaid principal balance of this loan, as provided under the [Higher Education Act of 1965, as amended, 20 U.S.C. 1070 et seq., and applicable Department of Education regulations]. This is called capitalization.
Except for interest [the Department of Education] does not charge me during an in-school, grace or deferment period, I agree to pay interest on the principal amount of my Direct Consolidation Loan from the date of disbursement until the loan is paid in full or discharged. [The Department of Education] may add interest that accrues but is not paid when due to the unpaid principal balance of this loan, as provided under the [Higher Education Act of 1965, as amended, 20 U.S.C. 1070 et seq., and applicable Department of Education regulations]. This is called capitalization.
On several occasions between 1998 and 2005, in violation of the terms of the consolidated loan, the Department of Education capitalized interest to Dr. Pfeiffer’s account for the period between her June payment and the close of the month – money that was not due until her July payment date.
Dr. Pfeiffer complained to the Department for the first time in early 2003 and no interest capitalization charge was added for that year. In 2004 and 2005, however, the Department again capitalized interest that was not due, and Dr. Pfeiffer once again complained. Several Department of Education personnel advised Dr. Pfeiffer that the interest capitalizations should not have been posted to her account, but that the Department of Education’s computer is programmed to capitalize accrued interest as of June 30 of each calendar year, even if the interest is not due and payable on that date.
After repeated complaints subsequent to additional improper interest capitalization charges, a supervisor in the Department of Education’s Direct Loan Servicing Center admitted that a June 30, 2005 interest capitalization should not have been added to Dr. Pfeiffer’s balance. The supervisor stated that she could not reverse the improper interest capitalizations in previous years; however, she would insure that there was no interest capitalization charged to Dr. Pfeiffer’s loan in 2006.
“The Department of Education’s improper addition of interest capitalization takes money out of the pockets of the people they are supposed to be helping,” said Steven Sprenger, lead counsel for the plaintiff. “It’s very unfortunate that officials within the Department allegedly knew about the problem and were unwilling to correct the situation.”
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