In a complaint filed Tuesday, federal prosecutors said that Sallie Mae employees violated the Servicemembers Civil Relief Act (SCRA), a federal law that extends legal and financial protections to military personnel.
Company staff denied some borrowers' benefit requests and stuck others with more than $500 in excess interest. And when soldiers fell behind on payments, Sallie Mae took legal action against them without documenting their military service, in violation of the law, according to the complaint.
Federal prosecutors estimate that about 60,000 service members were affected by the practices, which date to 2005.
The Justice Department has ordered Sallie Mae to pay $60 million in restitution and a $55,000 penalty in a settlement that needs court approval. In a separate case, the Federal Deposit Insurance Corp. has ordered the company to refund troops up to $30 million in late fees assessed on loans and imposed a $6.6 million civil fine.
Eligible service members will be contacted by an independent administrator who will distribute compensation.
All but $3.3 million of the fines will be paid by Navient, the student-loan servicing company that was spun out of Sallie Mae last month. Under the terms of the separation, which was initiated last May, Navient absorbed Sallie Mae's liabilities and 95 percent of its assets, including servicing rights to nearly $300 billion in student loans.
Neither Navient nor Sallie Mae admitted or denied wrongdoing. But the chief executives of both companies apologized for the harm done to service members.
In a statement, Navient chief executive John Remondi said the violations were "processing errors" that prevented members of the military from receiving the full "benefits they deserve." He added: "Over the past several years, we have implemented changes in our procedures and training programs to prevent these mistakes from happening again."
As part of the Justice settlement, Navient and Sallie Mae must request that all three major credit bureaus delete black marks on service members related to the interest-rate overcharges and improper legal judgments.
The companies must also simplify the process for service members to prove their eligibility under the SCRA statute. Instead of having military personnel submit reams of documents to establish their eligibility for better loan rates, companies can make the determination through the Defense Department database.
The FDIC launched a probe into Sallie Mae after uncovering violations of the SCRA statute during an examination of the company's banking unit in 2012. About the same time, Justice began looking into complaints from troops received by the Consumer Financial Protection Bureau.
"I have been concerned for some time about the way that military personnel are treated by their student loan servicers," said Holly Petraeus, assistant director in the office of service member affairs at the CFPB. "Sallie Mae gave service members the runaround and denied them the interest-rate reduction required by law. This behavior is…particularly troubling from a company that benefits so generously from federal contracts."
The case against Sallie Mae marks the first time the government has sued a student lender for violating the rights of military personnel. In the past five years, however, Justice has hit nearly all of the nation's big banks, including Wells Fargo, Bank of America, Citigroup, Ally Financial and JPMorgan Chase, with enforcement actions for wrongfully foreclosing on active-duty military.
As a result of the Justice investigation into Sallie Mae, the Department of Education is reviewing whether Navient's actions against military personnel are in violation of its contract to service federal student loans. The company collects payments on approximately $166 billion worth of federal loans for the Education Department.
"Once that review is complete, we will use the information to determine what appropriate actions — if any — should be taken against Sallie Mae's contract with the federal government," Education Secretary Arne Duncan said at Tuesday's news conference.
Duncan did not rule out terminating the department's contract with Navient, an agreement that is set to expire in June.
He said that the Federal Student Aid office will also comb through the records of the 10 other loan servicers, including Great Lakes and Nelnet, to make sure they are not charging service members more than the 6 percent interest permitted by the law. About $717 billion in federal student loans are managed by servicers, with American Education Service overseeing the largest portion of the portfolio.