Glitch

First, let's give credit where credit is due. Or maybe that should be, let's give discredit where discredit is due.

According to a scoop in Tuesday's Washington Post, a student loan borrower has filed a class action lawsuit against the U.S. Education Department, accusing the agency of having overcharged -- as a result of a computer glitch -- borrowers who refinanced their federal student loans.

The Post article lumps the allegations with others that have been made against the student loan industry in recent months. "The Education Department's student loan programs have been buffeted by a series of controversies and have come under increased scrutiny by Congress," the article states. "Lawmakers are investigating potential mismanagement and conflicts of interest."

But if the lawsuit's claims are true, the fault lies not with the lenders who make up the Federal Family Education Loan (FFEL) program, but rests squarely on the shoulders of Department of Education officials who run the Direct Loan program, which competes with FFEL for student loan business.

According to the lawsuit, at the end of June each year, the Education Department penalizes consolidation loan borrowers who miss any payments that year by capitalizing interest on the loans. As a result, the principal on the loans increases, and the borrowers' interest payments grow.

But Brenda K. Pfeiffer, the 41-year-old Minnesota chiropracter who is the lead plaintiff in the case, found that she was being penalized even though she had made all her payments on time. Pfeiffer alleges that the Education Department routinely and improperly capitalized interest that accrued on her consolidated loan between the time she made her June payment and June 30th, even though she was not responsible for making a payment until July. "Over the last five years, more than $1,000 was incorrectly charged to her," the Post article states.

In her lawsuit, Pfeiffer says that when she contacted officials at the Department of Education's servicing center, they acknowledged the problem but said there wasn't anything they could do about it.

Now we don't want to jump to any conclusions. This is just a lawsuit and we don't know if Ms. Pfeiffer's complaints are valid. The Education Department has not reponded to the suit yet. Also, if there is a problem, we don't know its scope. Ms. Pfeiffer's lawyers claim that all borrowers in the Direct Consolidation Loan program were affected. But it appears likely that the affected pool of borrowers is limited to those in the Direct Consolidation Loan program who like Ms. Pfeiffer repay their loans as a percentage of their income through the income contingent repayment process -- a relatively small subset of borrowers.

Still, if Pfeiffer's claims are correct, then the Department of Education must act immediately. The agency will need to identify those who have been affected and repay them. It also will need to readjust the principal on these borrowers' loans to ensure that they are not overcharged in the future.

Neither Democratic Congressional leaders nor Direct Loan advocates should take these allegations lightly. No student loan borrower -- no matter which loan program they're in -- should have to pay a penny more than they owe. No matter what side you are on in the Direct Loan v. FFEL debate, that much should be clear.

At the same time, it would be disingenuous of FFEL student loan industry officials and their supporters in Congress to use these claims to argue that the government is incapable of running a loan program.

Let's remember that it wasn't so long ago that FFEL leader Sallie Mae fessed up to its own sizable computer glitch. In 2003, the student loan giant admitted that for ten years it had improperly charged over 800,000 borrowers also because of a computer glitch. No one argued the error was cause for eliminating FFEL program.

Many in the higher education community, however, did urge Sallie Mae to rectify their error by writing off the missed payments. But Sallie Mae officials scoffed at that idea. Instead, they demanded that affected borrowers make larger monthly payments to make up for past underbilling -- in some cases over $100 a month more.

Sallie Mae officials even encouraged some borrowers to go deeper into debt to make up for the company's error. That's because the company urged borrowers who were having difficulty managing their newly adjusted, higher payments to switch to a longer term repayment plan. Sounds good--but by extending their repayment periods, the borrowers increased the total amount of interest that they owed.

Sallie Mae's apologists on Capitol Hill and the Bush Administration looked the other way in 2003 and left students holding the bag. Let's hope that Direct Loan supporters in Congress aren't tempted to make the same mistake.