A class-action lawsuit has been filed against St. Paul-based student lender Northstar Higher Education for allegedly breaking its contract with student borrowers.
The suit, filed Monday in U.S. District Court in Los Angeles, says the lender broke its contract by eliminating its "T.H.E. Repayment Bonus" -- a 0.75 percentage point interest-rate reduction -- to cope with the credit crunch.
Northstar suspended the benefit on Feb. 18, citing the failure of auction-rate securities it used to finance loans.
"While Northstar might be facing financial difficulties comparable to other banking institutions, this does not provide it with carte blanche to breach its contractual obligations," said the suit, which is seeking monetary damages and contractual interest-rate reductions for anyone who had a loan with Northstar on Feb. 18. The suit was filed on behalf of plaintiff Jennifer So of California by the law firm of Kabateck Brown Kellner.
Northstar has yet to receive a copy of the complaint. But in a statement, General Counsel Mark Lindgren said: "Northstar takes its obligations to its customers seriously and believes it has fully complied with the terms of its agreements. In particular, Northstar has always sought to provide its customers with the benefits from the T.H.E. Bonus but has never guaranteed that the bonus would be available under any and all market conditions."
Jon Austin, a spokesman for Northstar, said that the company is "confident that we communicated clearly and properly with our borrowers about all of their loan terms and that we will prevail against these baseless and reckless charges being thrown around by a contingency-fee law firm and its Beverly Hills PR firm."
Turmoil in credit markets has forced 120 lenders, including Northstar, to quit some loan programs, according to Finaid.org. Northstar temporarily ceased taking applications for federally backed loans in April but began accepting them again in recent weeks.
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