Recent Case Over Misapplied Student Loan Payments Opens Door for Possible Class Action Lawsuit

Here are the details of the case from the New York Law Journal:

• Hofstra law graduate consolidated $52,925 loans in 2006. 

• "His suit claims the defendants determined how much of a payment is applied to the loan's principal (instead of the amount applied to interest) based on the date the payment is received as opposed to the due date of the payment."
  • "Thus, if a payment is received on any day other than the due date -- including before the due date -- it will not be applied to principal correctly," Judge Greisa wrote.

• Here is a complaint I came across on a consumer affairs site that sounds eerily similar: 
  
  • "Their website states that if you have extra cash and want to lower the principal, you can, as long as you send instructions that it be applied to the principal balance. I did this and even put it on my check along with a note. I decided to check my account on line only to find that they actually paid off the interest (from the debted day-14th to the day they received the extra payment)then placed the rest on my principal, they did this with a second extra payment the next month (out of $120...$118 went to interest).
    
    I called today and spoke to 4 different Supervisors and none would change this and place it all on the principal. They couldn't understand that this really wasn't helping me because ultimately it isn't really helping to bring down my balance, they insisted it does. After numerous attempts to explain, they stated that if I had made the extra payment on the same day as my debit, then it would have been applied to the principal. Ummm...if I had the extra money at the same time the debit is due, I'd have made the extra pay."

• Plaintiff claimed breach of contract
  • "He claimed breach of contract, deceptive advertising and fraud against Education Finance Partners and breach of contract and fraud against Affiliated Computer Services, the company that processes payments and determines how much is applied to the principal."
    • Education Finance Partners filed for Chapter 7 bankruptcy last year so probably no "deep pockets" there

• Judge refused to allow case to go to arbitration as laid out in the promissory note, calling the terms of the loan "unconscionable":
  • "...arbitration clause requiring a consumer to waive the right to bring a class action is unconscionable where: "(1) The waiver is found in a consumer contract of adhesion, (2) in a setting in which disputes between the contracting parties predictably involve small amounts of damages, and (3) it is alleged that the party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out of individually small amounts of money."

Hmm...wanna bet there are enterprising lawyers scrubbing promissory notes for other lenders? 

Comments

[Ron Tough]

I also have a private loan consolidation with Education Finance Partners and my loan is serviced by ACS, just like the Plaintiff. We are both lawyers and we have similar balances. However, the difference between my loan and his loan is that mine is a variable rate and his is fixed (haha! mine interest rate is 6% lower than his!)...

I read my promissory note carefully and it says that they will first apply any payment to late fees, charges, accrued interest and then principal balance. It's daily accruing interest loan.

The Plaintiff claims that because his loan is a fixed rate, he should be strictly held to the amortization schedule of his note i.e. equal monthly interest payments and daily accruing interest should not apply. As a result of the daily accruing interest he claims that he has been charged a couple of hundred extra bucks.

The above complaint is something entirely different but still a common complaint. Some student loan lenders, instead of applying the extra to principal, will instead hold on to the money and advance your due date by the number of months your prepayment equals. Sort of a short term interest free loan to the lender in exchange for advancing next month's due date.

I avoid all these. Twice a month I take all my unspent money from my budget and make a payment online. Even though I'm signed up for autodebit, no money is debited because I've paid the bill in full. I've reduced my balance from $62k to $25k in about a year and a half.

My position is screw these people. I've got cheap money at a 3.57% interest rate (going down to 3.33 on Wednesday!); I do not want to be debt slave the rest of my life; I earned my degree and I want to pay it off and get it over with!

(of note my federal loans are at 3.5% but the private loan above will be only 3.3% - talk about how screwed up the financial markets are!)