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I have a federally subsidized loan (US), which was put into forbearance in March of this year. I didn't notice, because it is an auto pay account, but, I'm not in school and did not request any changes. The representative admitted this was their fault and would start billing again. The issue is: they charged me interest, during this time, for their mistake and recapitalized it into the loan. Making my total cost of ownership of the loan higher. Upon further inspection, they did this another time after they bought my loan, accruing interest without requesting payment, though they didn't recapitalize it.

This seems like they're extending my loan, which seems like it shouldn't be legal, I know if they do this on purpose, it's fraud, but they're still taking financial advantage of a glitch. The government subsidizes the interest, so it may also constitute federal fraud?

It seems illegal, but I can't verify that it is.

Edit: thanks for the answers, I apparently need to clarify. This isn't an issue with auto pay, I am aware of the legalities here. This is an issue of forbearance, for which the regulations are fairly obscure. Forbearance is legally defined, and only applies to returning to school or a directly requested and approved hardship, in other words, the bank isn't supposed to initiate it without cause, this is a consumer protection against a forever growing loan. But I'm not finding a specific set of law determining what is supposed to happen when the bank does this without permission, only the loan contract laying out the rules for going into forbearance. The company, Navient, is in a suit with the government for the mishandling of payments. The public description of how this is defined is vague, it could mean that each individual act itself is legal, but the trend is illegal, or it could mean that they're not following federal law on each account. The mechanics of the situation have also not been published, so I don't know what exact situations apply. But, if this were a home/car loan the bank is required by the government to perform a due diligence and the fee structures for late/delinquency must be defined in the terms. I've not been able to find a policy that covers forbearance in this way, but I do know that banks aren't allowed to profit from accounting glitches, which seems to be the closest statute to this issue.

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    Have you asked them about the charges? If they say "this was our fault, let me restart the payment" and you say "ok, thanks!" you can't go around claiming everything is fraud. Separately, autopayment glitches don't typically fall to the lender. The borrower needs to ensure payment is received in a timely manner.
    – quid
    Sep 22, 2017 at 5:10
  • I called to dispute the charge, they admitted fault, but everything is automated and there's not a way to appeal the charges. But, this isn't an auto pay issue, it's a forbearance issue. I did recently find that they are under suit from the government for illegal student loan lending repayment practices, but I can't find enough information as to how they were doing this and if my situation applies.
    – user1442498
    Sep 23, 2017 at 16:04

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The thing to recall here is that auto-pay is a convenience, not a guarantee. Auto-pay withdrawals, notices that a bill is due, all of these are niceties that the lender uses to try to make sure you consistently pay your bill on time, as all businesses enjoy steady cash flows.

Now, what all of these "quality of life" features don't do is mitigate your responsibility, as outlined when you first took out the loan, to pay it back in a timely manner and according to the terms and conditions of the loan. If your original contract for the loan states you shall make "a payment of $X.XX each calendar month", then you are required to make that payment one way or another. If auto-pay fails, you are still obligated to monitor that and correct the payment to ensure you meet your contractual obligation.

It's less than pleasant that they didn't notify you, but you were already aware you had an obligation to pay back the loan, and knew what the terms of the loan were. Any forgiveness of interest or penalties for late fees is entirely up to the CSR and the company's internal policies, not the law.

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  • Thanks, but the key here is that the loan was put into forbearance, which is a legal distinction that allows a bank to recapitalize interest. The terms of the loan are different under a forbearance. This wouldn't be the same as an auto or home loan. In traditional loan scenarios, there is a contractual obligation on the banks behalf to perform a due diligence in collection, which is federally mandated and designed to prevent this situation and provides for a delinquent fee structure. What I can't find is something to do with the legalities of a bank error forbearance.
    – user1442498
    Sep 23, 2017 at 15:57
  • If the loan was put into forbearance, then they would have sent you documentation describing your obligations under that scenario. I would refer to that documentation for more details. And if the collection due diligence is federally mandated, then you should be able to obtain more details from the appropriate agency for your situation. If you can't, then they likely don't exist, and my previous statement stands.
    – Marisa
    Sep 25, 2017 at 11:15

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