For a graduating senior with thousands of dollars in student loans, the SLM Corp., better known as Sallie Mae, may seem like a savior.
The company is one of many that offers graduates a loan consolidation program, which combines multiple loans at various rates into a single loan with a fixed rate. The tactic is meant to save money through lower interest rates.
But College Loan Corp., a competitor company, has said Sallie Mae has gone beyond simply offering its services by virtually forcing borrowers into its agreements.
CLC filed suit against Sallie Mae Monday, calling for an end to what company lawyer James Trefil labeled “obstructionist and anti-competition tactics.”
Trefil said the suit will seek damages of about $50 million. At issue, he said, is Sallie Mae’s handling of the single holder rule.
Trefil said the single holder rule states that if a borrower holds loans with a single lender, then that borrower must consolidate with that lender. He said Congress passed a statute that states a student with multiple lenders may consolidate loans with any company.
Trefil said Sallie Mae is attempting to lock borrowers into a relationship that would allow no other consolidation options. The company will do this, he said, by claiming that multiple companies that are indirectly connected to Sallie Mae constitute a single holder.
Trefil said that is against the rules.
“They are essentially trying to trap (borrowers) into a Sallie Mae loan,” Trefil said.
The basic reasoning behind Sallie Mae’s approach, Trefil said, is to force its competitors from the market. He said the suit will not only benefit CLC, but several loan companies.
“The consolidation loan industry is really quite large, and I don’t think people realize how many people are being harmed by this,” Trefil said. “(We want) an injunction and a declaration to try to force Sallie Mae to basically play by the rules.”
Sallie Mae’s public relations department would not answer direct questions about the suit. Instead, the company released a statement.
“This appears to be a contract dispute on a topic we have been discussing with CLC for months,” the statement said. “Our lawyers advise us that this case has no merit, and Sallie Mae is confident that we will prevail in the courts.
“It is unfortunate that CLC has decided to litigate in the press.”
In addition to bending the single holder rule, Trefil said CLC is accusing Sallie Mae of inducing university financial aid offices into giving it preferential treatment.
Trefil said that could have a negative impact on students.
“Students don’t get the benefit of competition,” Trefil said.
Leonard Gude, director for financial aid at USF, said that while the university will provide students with assistance as to where to seek consolidation, most of the process occurs after the student leaves campus.
Gude said, however, financial aid has done business in the past with Sallie Mae and owns a computer product from the company that is used to transmit loans.
“A number of our lenders process their loans through Sallie Mae,” Gude said. “The lenders process through Sallie Mae, and Sallie Mae begins a servicing relationship.”
The servicing of loans, Gude said occurs between the lender and the student. He said financial aid will process a loan through any lender a student chooses.
Gude said students are encouraged to do an exit interview with financial aid upon graduation. He said with low interest rates, several companies have gone into business strictly to handle loan consolidation.
“In the past, students normally went to their lender and requested consolidation,” Gude said. “The marketing of consolidation services is new.”
Trefil said it is these new companies that Sallie Mae is attempting to push out of business.
Trefil said the goal of the suit, besides the monetary damages, is to ensure future graduates have choices in loan consolidation.
“(If the suit succeeds), students will be given more information,” Trefil said. “They stand to save considerable money.”