Student Loan Fraud or Error and Bank Regulator Failure

Stafford Loan Problems And Student Loan Formula For Actual Interest Charged

When I was in graduate school, I got two a $2,500 student loans through the Stafford loan program, at 8% interest charged with an origination fee of a few hundred dollars. It was no bargain in any sense of the word, but I needed the money. The loan was immediately sold off by the bank I obtained it through, with the new servicer being ELSI - Education Loan Services Incorporated. There were so many different names on the paperwork, the heading on the statements reads: Massachusetts Higher Education Assistance Corporation: Stafford Loan Program Repayment Schedule. But the actual lender of record was Nellie Mae, a Federal agency going by the "Mae."

The problem is they kept sending me payment books where the amounts of the payments didn't match the math for the interest rate I was being charged. The worst of these errors started me thinking it was a giant fraud, because they were showing $50 payments and a statement showing for $2,850 of interest on a $2,500 loan to be repaid in just 8 years and 11 months - athe actual interest rate charged looked pretty close to 20%! You can plug the amounts into any loan calculator, even one for mortgages that compounds monthly rather than daily, and you'll see that the payment should have been less than $33 a month. All of this sounds like small beans today, for both loans the difference was $65 a month vs $100 a month, but the difference ($35 a month for nine years) wasn't going to pay back money I borrowed, it was going into somebody's pocket. Maybe the extra money would have ended up with the loan servicer (ELSI), maybe it would have found it's way back to the Stafford program, maybe the government would have ended up with it. But I'm relatively sure of one thing. If I had simply made the loan payments, nobody would have every said a word and the money would have been stolen from me. And how many people know how to calculate the interest rate on a loan from the payment amount?

So aside from arguing on the phone with ELSI for hours at a time and faxing and mailing calculations all over creation, I contacted the Massachusetts Banking Commission and asked them to investigate. In the meantime, while making the proper payments, I received no less than 17 dunning notices and five incorrect statements on the loan (complete with new coupon books). At one point, I sat down and used the standard loan payment formula with interpolation to determine the interest rate they were actually charging me on the loan. By interpolation, I mean I didn't use a computer, I just guessed an interest rate, solved for the payment, adjusted the interest rate higher or lower depending on whether I overshot or undershot the payment shown, and solved for interest again,and again until I came within two cents of the payment amount they were demanding. The interest rate they were actually charging me (remember, it states 8% right on the statement) turned out to be 19.85%! Following is a transcript of the letter I sent both the Banking Commission and the Education Loan Services Incorporated:

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The formula I have computes the payment R per payment compounding period, where the number of compounding periods is n. i is the interest rate per compounding period which I found by interpolation. P is the principle amount. The compounding period of one month was chosen for convenience, to match the payment period The error introduced, compared to using daily, yearly or continuous compounding, should be less than 1% on the interest rate.

R = P [ i (1 + i)ⁿ / {(1 + i)ⁿ -1}]

For the loan in question

n = #of payments = 107

R = amount of payment = $50.00 / month

P = principle = $2500

i = interest rate = 19.85% / year = 1.654% / month = 0.01654 (in decimal)

? = 2500 [ .01654 (1 + .01654)¹⁰⁷ / {(1 + .01654)¹⁰⁷-1}] = $49.98 /month (where ELSI shows $50.00)

Using the correct interest rate i = 8% /year = .0067 (in decimal)

? = 2500 [ .0067 (1 + .0067)¹⁰⁷ / {(1 + .0067)¹⁰⁷-1}] = $32.75

Note the loan included for comparison (ie, the final loan statement I got from ELSI after months of wrangling) shows R = $32 / month for 109 payments.

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The question that was always left in my mind was how many students ended up paying credit card level interest rates for their supposedly low interest student loans? I never could discover if the we were arguing over the typos of some lazy state employee or private keypunch operator, or if one of the parties involved in the loan was running a fraud.

After I heard back from the State Banking Commission assuring me that my loan now showed the correct amount (duh!) I tried another follow up. That letter read:

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Consumer Assistance Office

Division of Banks

Dear Ms. X

I appreciate your following up on the matter of my student loan, and although I believe I have arrived at the proper settlement of payment with ELSI (I am awaiting a final bill), I do not consider this matter closed. The point that concerned me the most in this affair was not correcting ELSI in regards to how much I owed them. At the time I first wrote you, our entire difference on the amount was down to about $60.00. The reason I wanted to involve your office was because my experience with ELSI, coupled with what I heard from other students and the Attorney Generals office about the number of complaints they receive against ELSI, left me wondering why they are allowed to do business in our state.

I have enclosed the information I sent you previously for easy reference, and I am including an interest calculation, on the following page, for one of the loan statements they sent me where the actual compound interest rate of 19.85% far exceeds the face value interest rate of 8.0%. I also included for reference an earlier loan statement with a similar number of payments for comparison. This loan statement, in which the interest rate was correct, had the wrong starting date, such that ELSI was informing me that I was 3 months behind, before the actual repayment period even began. Please note the difference in line #5, "Interest payable during repayment period" between the two statements, $979.98 and $2,850.00, for identical loans with almost identical payment periods. Also keep in mind that I received loan statements from ELSI on two other occasions with inflated interest payments. In every case, changes were insisted on by myself, and not originated by ELSI.

Please understand that I am an engineer and not an accountant, so if my figures are not exact and can stand correction, I will be happy to see it. My problem is that I do not believe that ELSI would have made any of the corrections to my loan had I not spent several hours on the phone (and several hours on hold) over the course of several months, arguing with customer service representatives. I was also lucky enough to have taken an economics course as an undergrad, and so could make some interest calculations. I am afraid that there may be many ELSI loan holders with incorrect loans, which like mine, make all of the errors in favor of ELSI. I would like to have explained either how my figures are so far off, or why ELSI was so far off. If I am correct, and ELSI is incompetent, or even criminal, what is being done by the State Banking Commission to ensure what happened to me isn't happening to others.

Yours Truly

Morris Rosenthal

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The final reply from the State Banking Commission

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Dear Mr. Rosenthal

I received your letter regarding the calculation of an interest rate from a disclosure provided by ELSI.

To the best of my knowledge your calculations are correct. However, the disclosure you are using was in error, and there is no indication that ELSI was utilizing a rate higher than 8% on your loan to apply to your payments. ELSI provided your brief loan history showing that 8% was used. I have been involved in researching ELSI complaints for over 5 years and I have never witnessed an error in application of an interest rate. In an incorrect disclosure states a higher payment, upon application the excess above the correct payment would be applied to the principle and the loan would be reduced faster. ELSI uses a simple interest, daily accrued method.

This Office does not directly regulate ELSI as a servicer. I will be researching the extent of the Division's capability to intervene in their practices and will continue to assist complaintants. Thank you for bringing this to our attention.

Sincerely

Consumer Assistance Office

Division of Banks

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Now let me translate this response for anybody who may have missed it. Ms. X informs me that they get plenty of complaints about errors in student loan interest rates, but whenever the loan servicer gets caught, they make changes. Therefore, its' all good clean fun. After all, if somebody overpays every month and doesn't know it, maybe ELSI will tell them their loan has been paid off early. Maybe not. I never saw any evidence that they were doing math correctly. And yes, my loan history would show the proper payments because I always ignored the incorrect statements they sent me and made the payment amounts I calculated myself!

So for any student loan payers out there. Stafford , backed by Nellie Mae or otherwise, do yourself a favor and check whether they payments you are making are really correct. There are a lot of crooks and brothers-in-law involved in any program that involves government subsidies and hand-outs, and you can't expect your state regulators to protect you. If you need a cheer-up break about education after reading all this, see my flowchart for troubleshooting student problems before college.

This guide is in progress, and I welcome your comments, questions and suggestions