Student-loan holders say efforts to consolidate payments are being sabotaged


NEW YORK -- Is the student-loan industry sabotaging the government's new student-loan consolidation program? That's what I've heard from some readers who are seeking to enter the government's plan.

These readers are currently out of school and trying to lower the cost of their monthly loan repayments. They'd also like to consolidate their student loans, so they can pay with a single check. They say that the government offers better terms than the private consolidators do. But their lenders have blocked them from switching to the federal plan, by failing to fill in the needed forms.

Take John McNeilly, 32, of Arlington, Va., who owes some $53,500. Due to bouts of unemployment and procrastination, he defaulted on some of those loans.

Now out of graduate school and working, he is seeking an affordable way of repaying what he owes. The private programs, he says, want too much per month -- in the $500 range. But under the government's new "income-contingent" program, repayments are linked to what you earn. McNeilly says he could pay as little as $337.

Before he can switch to the government plan, however, the lenders and loan-guaranty groups that currently hold his loans have to tell the U.S. Education Department how much he owes. All but one have done so. The holdout: the USA Group in Fishers, Ind., a persistent opponent of the federal program. USA can make good money by hanging on to McNeilly's loan. Conversely, more money can be recovered for the taxpayers if McNeilly switches to the government plan.

USA Group spokesman Bob Murray claims that McNeilly isn't eligible for federal loan consolidation. Before making the switch, he says, McNeilly has to make three consecutive payments on his USA loan.

Not true, says Leo Kornfeld who runs the government program. The law specifically says that the government can consolidate loans in default. Kornfeld is investigating the case. Murray says that USA is reviewing the issue.

Steven Fought, 41, also of Arlington, is fighting a different kind of battle with the Pennsylvania Higher Education Assistance Agency (PHEAA).

For four months, PHEAA has been rejecting the paperwork that would transfer Fought's loan to the government plan -- always, he says, for petty or erroneous reasons.

Telephoning PHEAA "is my hobby now," he told my associate, Amy Eskind. PHEAA spokeswoman Susan Grimm says that PHEAA is cooperating with the government, which Kornfeld confirms. But the forms have to be exact and it's easy to make mistakes.

Fought, a part-time law student who works for a congressman, owes $12,400 on three loans and is not in default. He wants the government's loan-consolidation program because it offers more flexibility and a lower payment than PHEAA does.

The Student Loan Marketing Association (Sallie Mae), another fierce opponent of federal loan consolidation, is trying a different tack.

It has threatened to stop transferring loans to the government for borrowers that it thinks are ineligible for the plan.

One test of eligibility contained in the law: borrowers must have checked out a private loan-consolidation plan and decided the federal plan was better. Sallie Mae thinks its borrowers ought to be required to consider the Sallie Mae plan.

Kornfeld says Sallie Mae is misreading the law. It can't require students to consider one particular plan nor has it the right to determine eligibility. Only the government can do that. Sallie Mae attorney William Ingram says the company has contacted 1,000 students by phone and found that most haven't considered any private program. But so far, it's still transferring loans.

It has, however, been misinforming borrowers about the federal program -- for example, by erroneously claiming that the government doesn't have flexible repayment plans.

Sallie Mae spokeswoman Gisella Vallandigham says they'll reconsider the wording of the material that borrowers get. The USA Group, McNeilly says, tried to talk him out of the switch by saying the government's plan was failing. On the contrary, the federal government has consolidated some 15,000 loans so far, worth $100 million.

Many private lenders cooperate with the government, so you might not be hassled at all when you request a transfer. Warnings have gone out to those who tell fibs.

Kornfeld urges you to report any stonewalling to the Education Department at 1-800-4-FEDAID.

Call 1-800-455-5889 for information on federal student loan consolidation.

You can write to Jane Bryant Quinn at: Newsweek, 444 Madison Ave., 18th floor, New York, N.Y. 10022.

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