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Double Billing: The True Cost of Selling Student Loans

April 16, 2009

By Jillian Estes:Fight Over Money

Karen Mahnk did everything right in borrowing for college. She borrowed only low-interest federal loans, took out only what was needed to support herself and her son, and used only one lender to simplify repayment. So it’s hard to understand how Karen simply has no idea who owns her loans.

What Karen does know is that Sallie Mae has spent seven years sending bills but never sent proof of the debt, that Wachovia claims it’s still servicing that same debt and that a federal consolidation is her last hope for figuring out how to pay for her loans.

But, with a federal servicing contract threatening to send all the loans right back to a private lender, Karen fears this could start the vicious cycle all over again.

“It Must Have Been a Mistake”

In 1994, Karen Mahnk was a newly-divorced single mother who desperately needed a way to get her life back on track. Knowing that education was critical, Karen recalls that she was “so grateful that the money was available and for the opportunity to borrow what (she) needed to get by.” Like so many students, the debt added up quickly, but Karen was very careful to borrow only federally-backed, low-interest loans and to borrow every single loan from the same lender, Wachovia. She “just wanted it to be simple.”

So when a letter from lending giant Sallie Mae suddenly showed up in 2002, Karen assumed it was a mistake that would eventually work itself out. After all, the bill was only for two of the nearly dozen loans that she had borrowed, and there was no indication that Sallie Mae had actually bought the loans from Wachovia. It was naïve, she realizes now, but she just figured the lenders would figure things out on their own.

Karen realized she had a real problem in 2005 when her grace periods were over and bills were coming due. Sallie Mae and Wachovia were both still billing her and no matter how hard she tried, she couldn’t get the lenders to work together to figure it out who owed the loans. After so much confusion, Karen decided to just give up the fight and apply for a consolidation with Sallie Mae. They denied the request, claiming different reasons in different letters.

Turning to Wachovia as she had from the beginning, Karen applied for a consolidation for all of her loans, including the two that Sallie Mae had claimed. Her consolidation was approved and she has been faithfully paying on that debt ever since.

What happened next is up to the lenders to explain. Sallie Mae claims it was never paid for the loans, though it still has never shown that it has any legal claim to the debt. Wachovia claims to be servicing the loans in question, as they have from the beginning. And Karen is trapped in the middle, an unwitting pawn in the disastrous game of student loan securitization.

Looking For A Way Out

In March, Karen made one final act of desperation: she asked the government for help in the form of a federal loan consolidation. She knew that both lenders would likely submit a pay-off request, but even if it meant paying for the same loan twice, she just wanted to be done with the harassment and confusion once and for all. Karen received email confirmation that Sallie Mae had submitted their pay-off request as of March 19, so she thought her fight would finally be over.

She was wrong.

On April 6, Karen received two letters in the mail on the same day. The first one, from a Sallie Mae-owned bill collector, said it received notice of the federal consolidation on March 9 and that “all involuntary collections efforts were ceased at this time.” The letter seemed to be the long-awaited answer to Karen’s prayers.

The second letter, however, brought those short-lived dreams crashing back to reality. This letter, unsigned but on Sallie Mae letterhead, was dated March 27, almost three full weeks after Sallie Mae got notice of the pending consolidation and over a week after they demanded payment of the debt from the US government. Nevertheless, Sallie Mae indicated it would still be aggressively pursuing collections, including a veiled threat of wage and tax refund garnishment and a demand for $18,811.43 on a $10,000 loan.

The letters were sent four days apart, so she has no idea which one to believe.

“They’re Going To Do It Again”

Karen’s story provides a brief but alarming glimpse into the complex web that is the student loan industry. The guarantors, lenders, servicers and collectors are inextricably intertwined through ownership and business practices. Yet, when cooperation is required to resolve an individual loan issue, it seems as though every agency speaks a different language.

When a responsible borrower like Karen would rather pay a loan twice rather than try to fight any more, it’s a sign that the system is irreparably broken. Karen, like so many others, has become a prisoner in a broken system that is created by the lenders.  And if the federal consolidation doesn’t work, then she has no way out.

If Sallie Mae or Wachovia are given free rein to continue these practices as federal loan servicers, these disasters are certain to happen again. Karen knows the repercussions of loan better than anyone, but she also knows it can get so much worse if the federal contract is granted and the system doesn’t get fixed.  Karen’s fear is, “They’re going to do it all again. They’re going to figure out a way to commit even more fraud on the public, and with no consumer protections, there’s nothing stopping them.”

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Written by Jillian Estes · Filed Under Consumer Alerts!