Sluggish Service Claim AfterRush For Loan Consolidation
By Jonathan D. Glater
THE NEW YORK TIMES
Tens of thousands of undergraduate and graduate students rushed to consolidate their federal student loans this spring and summer, trying to lock in lower interest payments before higher rates took effect on July 1.
But frustrated students and executives at some of the companies that process the applications accuse big lenders like Wells Fargo, Wachovia and even Sallie Mae of violating federal regulations and slowing the process, charging the higher rates in the meantime.
“They’re dragging out the period of time,” said John F. Wallace, executive vice president at NextStudent, a student lending company that is a large loan consolidator. “They’re hoping that you’ll go away, that they can keep the loan on their books, and that you’ll stop asking for it.”
He and other consolidators say the banks have several incentives to delay. One is the interest rate. Congress has raised the maximum interest rates that lenders may charge on student loans. As of July 1 the rate for students paying off Stafford loans rose from 5.30 percent to 7.14 percent, and nearly every lender charges the maximum.
In addition, Congress abolished a requirement that a student who borrowed from just one lender must consolidate with that lender. Now students can shop around for the best deal and switch financial institutions. If lenders slow the process, the borrowers are frozen in place — at least for a while.
NextStudent notified the federal Education Department last week of the problems it had encountered. “We tried to resolve this issue with the companies directly, at the staff level or further up,” Wallace said. “We’ve finally resorted to going to the regulatory authority that has jurisdiction.”
One problem even came up with one of its own employees, Aaron Kanitz, who started the process of consolidating his student loans through NextStudent in April. He said he learned in June that his original lender was saying he had changed his mind. “I had never made any indication verbally or written that that would be the case,” said Kanitz, who declined to identify the lender for fear of jeopardizing his consolidation.
The Education Department can impose money penalties on lenders and, in extreme cases, can bar them from participating in federal loan programs. A spokeswoman for the department, Jane Glickman, said it would “research and respond to each complaint on a case-by-case basis and determine what, if any action, is required.”
Since Oct. 1, the department has received 78 inquiries about consolidation delays from borrowers and 3 from student loan lenders, including NextStudent. The department has requested more information from NextStudent.
Banks and other lenders say that if there are lags in processing applications, they are the result of the sheer number of students who have applied to consolidate their loans; one consolidation company received 40,000 applications in June alone. There is no central database that tracks the pace of consolidation activity.
Consolidation of debt allows borrowers to combine several loans, so that they pay a single interest rate on the total and make one monthly payment. To complete the process, the company that loaned money to a student must provide a “loan verification certificate,” so that the consolidating company knows exactly how much money it needs to pay off the student’s existing loan.