Sneaky Banks, Student Loan Corp.|Keep Students in Debt, Class Claims

MANHATTAN (CN) - Citibank, Discover Bank and The Student Loan Corporation are tricking former students into believing that their monthly payments have been cut when in fact only the payment toward principal has been lowered, generating greater interest income for the banks over the longer life of the loan, according to a federal class action.

Lead plaintiff Justin Kuehn, who is paying off four student loans, claims the defendants "are engaged in a scheme to collect additional interest at the expense of borrowers of student loans."

Kuehn claims the defendants are systematically breaching contracts and violating general business law.

"Defendants are engaged in a scheme to collect additional interest at the expense of borrowers of student loans," the complaint states. "Defendants are deceiving borrowers into believing that their monthly payments have been reduced because of an interest rate reduction, when in fact, the vast majority of the payment reduction is attributable to a reduction in the amount of principal being repaid each month. The end result is an extension of the loans' repayment term causing thousands of dollars in additional interest to be paid by student loan borrowers over the life of their loans."

Kuehn says he consolidated two CitiAssist Graduate loans and two Sallie Mae Grad Excel Unsubsidized loans through the Student Loan Corporation in late 2007.

Part of the consolidated loan program called for Kuehn to have payments debited from his account every month, he says.

In 2008-08, Kuehn says he made extra payments of $25,000 toward the principal of his loans. He says his monthly auto-debit payments remained the same: $845.72, until he got a notice that Citibank sold his consolidated loan to Discover in late 2011.

Early this year, the Student Loan Corporation sent him a letter stating that it dropped his payments to $539.27, falsely claiming that the change reflected his new interest rates, he says.

"The interest rate misrepresentation is false, deceptive, and misleading because it masks from borrowers the true reason for the drop in the monthly payment amount - a massive decline in the amount of the loan's principal being repaid each month," the complaint states.

"In January 2012, the interest rate for the Consolidated Private Student Loan was only reduced 0.5 percent, from 9.55 percent to 9.05 percent. According to plaintiff's January 2012 statement from SLC, the total current balance of the Consolidated Private Student Loan at that time was $64,791.19. The 'new interest rate' does not account for plaintiff's monthly payment decline of over $300 per month.

"As a result of the reduction to the monthly payment, the amount of principal being repaid on the Consolidated Private Student Loan declined from $335.67 in December 2011 to $42.59 in January 2012, namely, a decline of $293.08 per month, while the amount of interest paid remained basically the same, declining only from $510.05 in December 2011 to $496.68 in January 2012. This fact was not disclosed by defendants.

"On January 4, 2012, plaintiff made two calls to SLC customer service to inquire why his monthly payment declined over $300 from December 2011 to January 2012. On both calls plaintiff had to navigate through a lengthy automated process to get to a customer service representative. The difficulty in contacting a customer service representative at SLC is exemplified by the fact that the first automated list of options does not include the choice of speaking to a live representative.

"On both of the calls, plaintiff received varying and inconsistent answers as to why his monthly payment declined from December 2011 to January 2012 so dramatically, and the representative refused to return plaintiff's monthly payment to the original amount."

Kuehn seeks treble damages for breach of contract and business law violations, and an injunction.

He is represented by I. Stephen Rabin with Rabin & Peckel.

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