I received my yearly correspondence from Nelnet asking me to send documentation of income so they can update my payment amount under IBR. Near the bottom it states the following:

After your current 12-month period ends, if we do not receive your current proof of income needed to renew the PFH amount, if you do not qualify, or if your new PFH monthly payment amount is not enough to satisfy the interest that adds up (accrues) during your repayment period [emphasis added], the remaining unpaid interest will be added to your principal balance (called capitalization).

An agent reached by phone confirmed that my accruing interest will be capitalized. Are they simply wrong about the law? I thought interest would never capitalize while I am under a partial financial hardship and IBR. Can you point me to the statute, or at least a statement on a government website, that says so?

I also had this happen to me. They did not give me any warning but simply sent an email stating “In the past, your loan payments were in an income-driven repayment plan that offered you a reduced payment amount. At the end of your reduced payment amount period, any accrued interest was added to your principal balance (this is called capitalization). During a recent review of your account, we found that the amount of accrued interest was not added to your principal balance at the appropriate time. As a result, less interest was capitalized than should have been. To correct this issue, we have adjusted your principal balance and accrued interest amounts.” - and they promptly added over $1,000 in interest to my principal - no warning, no citation of a statute or legal explanation, and more frustratingly no explanation of how they calculated that amount. I still have PFH and am still in IBR!!

I called Nelnet and spoke to a supervisor, Mallory, who spent 40min reading every document she had to substantiate this and at the end of the call admitted she did not know how to explain it and would contact her “training supervisor”. I contacted FSA who said to talk to the Ombudsman. I presented all my documentation and record of communication and what do I get from the ombudsman? Talk to your servicer (Nelnet). I am beyond frustrated right now, because according to all legal documents and applications I have submitted and signed there is nothing to indicate our yearly unpaid interest should be capitalized each year upon reapplication only if we leave the IBR program or are seen to not have partial financial hardship (PFH).

I would love more guidance on this from Heather Jarvis or anyone that might know the legality of this and how Nelnet can do this without any warning or chance to save/pay off before capitalization occurs!

I got an identical email, which was entitled, bizarrely, “We Have Reduced Your Nelnet Account Balance.” My online account also showed that the interest had been capitalized.

The relevant Department of Education regulation is at Title 34, Section 682.215(b)(5) of the Code of Federal Regulations and states, “accrued interest is capitalized at the time the borrower chooses to leave the income-based repayment plan or no longer has a partial financial hardship.” It is available online at http://www.ecfr.gov/cgi-bin/text-idx?SID=397aeb9d6f0813e8e1f71feeb939bcce&node=se34.4.682_1215&rgn=div8 . You can also see the original law passed by Congress, which states the same thing, at http://www.law.cornell.edu/uscode/text/20/1098e .

A Nelnet call center agent said that I had waited too long to send my yearly income documentation (which shows I am still under a PFH) and that the capitalization could not be unwound. She even said it didn’t matter that I had sent the documentation by the deadline they had given me! They had asked for the info months ago, and it was my fault I had waited so long.

Even now, the true deadline has not passed. The regulations (and their own letter) state that the documentation can be received up to 10 days after the deadline they give me. In the absence of documentation, they cannot make changes until then. Their letter states a deadline of August 21. Today is only August 26.   

The agent’s supervisor said that some letters had been sent out with an incorrect deadline. She said if I fax Nelnet the letter, they will unwind the capitalization. I faxed the letter two days ago. My account shows no change since then.

My case might be different than yours because of the deadline issue. On the other hand, your case seems to show they were going to capitalize my interest regardless. I should also add that they have raised my payment to the standard amount, something they also are not allowed to do until 10 days after the deadline.

Nelnet has a history of incompetence with me. It took several months to just get on IBR because they kept calculating the payment incorrectly. (It was too high, naturally.)

Please keep in touch. I will as well.

Thanks for the reply - WOW, Nelnet is the worst! I thought it was just me that has gotten the worst luck when they make errors on my account and communication! I am calling them back this evening then because I sent mine in almost a month before the deadline and this is still happening.

I think truthfully, someone in the legal department of either FSA or Nelnet misread a statute or something and screwed everyone up. The woman at Nelnet I talked to Mallory said they received a memo from FSA saying they could do this. When I asked her to provide me with the memo or any documentation that’s when she said she’d as her “training supervisor.” You’ve further convinced me I am right in this and will continue to push back on them to undo that capitalization! I’ve read several of Heather’s posts that say this same thing - it should only be capitalized if we leave IBR or do not have PFH.

And you would think (even if it was legal) they would at least warn us of the impending capitalization (like they do in ICR) rather than just an automated email saying its already been done!

So angry!!!

Today I got a call from a supervisor at Nelnet. She admitted that they had received my information and request for IBR renewal on Aug. 25. However, she said it was too late to return my September payment to the correct IBR amount. She said all of my accrued interest had been capitalized but that she would “put in a request” to unwind the capitalization, since they had given me the wrong deadline. I don’t hold out much hope since I have already requested this with the letter I faxed them as instructed (see above). Nelnet’s actions were in direct violation of the Dept. of Education IBR regulation:

(5) Except as provided in paragraph (b)(4) of this section, accrued interest is capitalized at the time the borrower chooses to leave the income-based repayment plan or no longer has a partial financial hardship.
...
(8) If the loan holder receives the information described in paragraphs (e)(1)(i) through (e)(1)(iii) of this section within 10 days of the specified annual deadline—
(i) The loan holder must promptly determine the borrower’s new monthly payment amount.
(ii) If the loan holder does not determine the new monthly payment amount by the end of the borrower’s current annual payment period, the loan holder must prevent the borrower’s monthly payment amount from being recalculated in accordance with paragraph (d)(1) of this section and maintain the borrower’s current scheduled monthly payment amount until the loan holder determines the new monthly payment amount.

The regulation does not refer to any right or wrong deadline, but merely to the deadline given me by the loan holder, which can’t be earlier than 35 days before the end of the annual payment period. They gave me the deadline;I followed it; and now they are saying I am screwed because the deadline was wrong.

They gave me a hardship forbearance for the September payment, which is not satisfactory since a month’s interest will be capitalized. I should add that some interest was capitalized two years ago since it took them four months to put me on IBR after my request for it. The supervisor couldn’t explain why it took four months. She apologized, but no, she couldn’t unwind that capitalization either.

I’ll will file a complaint with the FSA.

Good news! A couple of months after I contacted them, the FSA got Nelnet to unwind the interest capitalization in full.

How did your case word out, Tiffany? Has anyone else had a similar problem?

Although I have a different servicer I’ve had similar capitalizations happen to me as well. I have found that when I submit yearly proof of income, as required under IBR, my servicer automatically places my account into forbearance for 1 month. At the end of the month all interest accrued to date then capitalizes. I have also contacted the Dept. of Education who says they shouldn’t be allowed to do that. I have written my servicer explicitly requesting they not place my accounts into forbearance, they do it anyway, and then I have to get them to reverse it. It’s maddening. Seems like this is systemic with servicers and highly profitable for them.

Has anyone talked to a lawyer about taking action?

Although I have a different servicer I’ve had similar capitalizations happen to me as well. I have found that when I submit yearly proof of income, as required under IBR, my servicer automatically places my account into forbearance for 1 month. At the end of the month all interest accrued to date then capitalizes. I have also contacted the Dept. of Education who says they shouldn’t be allowed to do that. I have written my servicer explicitly requesting they not place my accounts into forbearance, they do it anyway, and then I have to get them to reverse it. It’s maddening. Seems like this is systemic with servicers and highly profitable for them. Has anyone talked to a lawyer about taking action?