Sallie Mae Rival to Sue Over Loan Consolidation

A competitor of SLM Corp. plans to file suit in federal court today, charging the giant student loan and college finance company, widely known as Sallie Mae, with trying to force thousands of student borrowers to continue to do business with it.

At issue is student loan consolidation, a process by which borrowers who have more than one loan at variable rates can merge them into a single, fixed-rate note. Such consolidations are highly desirable at the moment for many students because they can lock in historically low interest rates. Rates on student loans have dropped below 4%, in some cases.

The rate is set by a federal formula, but some lenders offer special programs, such as discounts for electronic payment or for a certain number of months of on-time payments, for which a borrower might shop.

However, the rules say a borrower whose loans are all held by the same lender must consolidate with that lender, a provision known as the single-holder rule. “Borrowers whose notes are with different holders can use any of the 4,000 lenders in the program, provided they make consolidation loans,” said Mark Brenner of College Loan Corp. of San Diego, the plaintiff.

In the suit, CLC plans to accuse Sallie Mae of intentionally misapplying the single-holder rule by contending that all of its affiliates constitute a single holder and that the company remains the holder of loans it has bought and packaged into securities for sale to investors.

CLC officials said they plan to charge that Sallie Mae’s position that its affiliates constitute a single holder is the opposite of what it argued several years ago in a dispute with the government over so-called offset fees that Congress imposed on the company when it was a government-sponsored enterprise.

In a statement, Sallie Mae said: “Since we opened for business nearly 30 years ago, Sallie Mae has followed the letter and spirit of all applicable laws and regulations. While we have not seen a copy of this filing, we are confident that our policies and procedures are, as they always have been, consistent with the rules followed by the hundreds of companies who compete in the student loan marketplace.”