Student Loans: Law Graduate Sues Lenders for Interest 'Scheme'

May 2, 2012 — -- A law school graduate is suing his student loan lender and servicer over what he claims is a "scheme" to wring additional interest from student borrowers.

Justin Kuehn, 29, a graduate of George Washington University Law School, accuses Citibank, Discover and Discover's subsidiary, The Student Loan Corporation, of "deceiving" borrowers into believing that their monthly payments had been reduced because of an interest rate reduction when the payment toward the principal had just been lowered. He says he hopes his case becomes a class-action lawsuit.

Kuehn, who practices commercial litigation in New York City with the law firm Brar Wexler Eagel and Squire, is requesting an injunction and unspecified damages from the defendants for systematically breaching contracts and violating business law.

By the time Kuehn graduated from law school in 2007, he had four separate private graduate school loans. He consolidated the four -- two with Citibank and two unsubsidized loans with Sallie Mae -- with the Student Loan Corporation in November 2007. The original balance of his consolidated loan, with a fixed interest rate of 9.55 percent and standard payments, was $99,148.19.

Kuehn had an automatic debit monthly payment of $845.72 from his checking account for four years, occasionally making additional payments to the principal to repay the loan faster, until January 2012. That's when he said the Student Loan Corporation "unilaterally" dropped his monthly payment to $539.27, but his interest rate was only reduced by 0.5 percent to 9.05 percent from 9.55 percent.

"They claimed it was due to an interest rate reduction but I knew that, just by the amount of that drop, that couldn't be correct," Kuehn told ABC News.

His monthly statement read, "The variable interest rate on your student loan has changed. Your monthly payment has been adjusted to reflect the new interest rate, as stated above."

Because of this change, he later learned the amount of principal being repaid on the loan declined to $42.59 a month from $335.67, while the amount of interest paid remained "basically the same," declining only to $496.68 from $510.05. Kuehn said this information was not disclosed by the lender.

Kuehn said he was "outraged" when he realized the term of his loan had been extended without his consent.

"This will lull you into the belief that you are not paying more interest when in fact you are," he said. "They've basically extended the term of your loan and labeled it as a reduction to the interest rate."

A spokesman for Discover said the bank couldn't comment on pending litigation. Discover completed its acquisition of The Student Loan Corporation, a private student loan business, in January 2011.

Mark Rodgers, a spokesman for Citibank, said the bank has not been served with the lawsuit, "so we would be unable to speak to the matter at this point."

Kuehn's loans are private loans, but federal loan recipients have reported similar problems, saying they were forced to pay more interest over a longer period.

The Department of Education has been transferring federal student loans to loan-servicing companies, similar to The Student Loan Corporation, which then adjust their payments up or down, the nonprofit news organization ProPublica reported last week.

"Student loans can be terribly complex and difficult to understand for even the most sophisticated borrower, much less for a student who may have limited credit experience," said Gerri Detweiler, financial expert with Credit.com. "You shouldn't need a degree in finance to understand what a student loan will really cost, but these days it's not a bad idea."

Detweiler said problems like Kuehn's are just some of the "math" problems students run into on their loans.

"If they fall behind and their loans go into default, it can be even more challenging to get an accurate accounting," she said.

In the suit, Kuehn said the defendants violated the "customary and usual business practice" of reducing the principal balance and maintaining the monthly payment amount when extra payments are made on a loan, "thus substantially lowering interest costs."

According to public financial aid service, FinAid.org, all federal and private student loans allow for penalty-free prepayment to pay off the balance of the loan.

He said he called the Student Loan Corporation's customer service phone number twice on January 4 and was told he could not return his monthly loan payments to the original amount.

"The [customer] representative refused to return plaintiff's monthly payment to the original amount," the filing stated.

"I tried to resolve this with them and they were not open to it," Kuehn told ABC News.

Until the company responds to the lawsuit or his concerns, Kuehn said he continues to make the lower monthly payment on his loan.

"I'm trying to figure out what's going on," he said. "Initially you just want the problem fixed and then you realize there is no communication on their end, so you're forced to take action."