I, like many others, recently received a letter about my participation in MHESLA’s MI Students First program. The arrangement had been that, after I made 36 monthly on-time payments, my interest rate would be reduced to 0%. The letter informed me that the new arrangement would be that my interest rate would not be reduced. Assuming I don’t start making extra payments, this means I now owe an additional $10,000 in interest over the life of the loan. This apparently does not affect borrowers whose repayment schedule started in June 2007 or earlier. Unfortunately for me, my repayments started in December 2007.
Today I learned that a similar thing happened with NorthStar Education Finance: they offered a 0.75% rate reduction for on-time borrowers but then decided stopped paying it (to existing borrowers!) in February 2008. This prompted a class-action lawsuit for breach of contract and unfair and deceptive trade practices. NorthStar settled for $9.75M plus attorneys’ fees. With 120,000 affected borrowers, that is an average of $81 each.
The Michigan.gov webpage says “The Michigan.gov webpage says “MHESLA reserves the right to revise or discontinue offering borrower benefit options at any time,” and the Wayback Machine shows that disclaimer has been there since at least 2006. If I read that in the past, I would have assumed it only referred to new loans. Also, the four letters I received in the mail describing the benefit had no such disclaimer. Two of the letters present it as a 3-step process (receive loan, pay 36 months to get 0%, then stay current) and state “That’s it! As simple as 1-2-3!” MHESLA’s ability to back out was also not mentioned when I called in 2007 to confirm the offer.
I believe MHESLA’s original plan was to stand by the offer, and the problems from the financial downturn were not expected. However, I have a bad feeling that the recent action was calculated without regard to ethics, e.g. “Sure, we’re going to get sued for breach of contract, but the settlement will probably be pennies on the dollar compared to the additional revenue.”