NorthStar Education Finance to repay students nearly $10M

If you have a student loan with NorthStar Education Finance, then the St. Paul-based organization may owe you money.

U.S. District Judge Donovan Frank approved a final class-action settlement on Thursday that requires NorthStar to pay borrowers $9.75 million for failing to pay a promised repayment bonus. The not-for-profit, which once claimed to provide students with 10 times the value they'd get from other lenders, stopped paying its customers a 0.75 percentage point interest-rate reduction in February 2008, citing the credit crunch.

Plaintiffs' attorneys allege that suspending the "T.H.E. Repayment Bonus" amounts to NorthStar breaking its loan contract with students. NorthStar denies any wrongdoing but agreed on a settlement because "we believe it's in the best interest of borrowers," said Leonard, Street and Deinard attorney Todd Noteboom, representing NorthStar.

The settlement applies to borrowers and co-signers who had a loan in repayment when the bonus was suspended on Feb. 18, 2008, and are no more than two months late on their loan payment. The settlement amount owed to borrowers will be placed in a trust and credited to student loan accounts over a five-year period. Attorneys will be paid up to $4.5 million on top of the $9.75 million settlement.

While the exact amount individual borrowers will get from the settlement depends on individual loan amounts, the payments won't be large. There are about 120,000 borrowers eligible for the class-action lawsuit, amounting to an average of $81 per person. Borrowers may see a larger amount depending on Northstar's profitability, but that's a big "if."

"The bottom line is that Northstar's business model is now exposed as fundamentally flawed," said Owen Bonheimer, an attorney who took out loans through NorthStar for his law degree. "It failed to disclose these flaws or the associated risks to borrowers. Now, through the settlement, it seeks to hitch borrowers' benefits to the resuscitation of a failed business model. This is simply unfair." He picked NorthStar because he expected to save nearly $16,000 with the repayment bonus, and flew from Washington D.C. to object to the settlement.

NorthStar is hopeful that it will be able to pay above the $9.75 million guarantee, but "is really dependent upon the credit markets continuing to loosen and our ability to secure favorable financing going forward," Noteboom said.

Turmoil in the credit markets and slashed government subsidies for financial institutions offering government-guaranteed loans forced many lenders out of the business in recent years. NorthStar stopped originating government-guaranteed loans in April 2008. Remaining lenders slashed perks for good behavior and raised fees. Now a new law eliminates financial institutions as middlemen for government-backed loans in favor of the Direct Loan program through the U.S. Department of Education.

NorthStar appears to be reinventing itself. A news release in December announced the launch of NorthStar Education Services, providing Web-based financial literacy courses, private loan origination and default prevention to schools, nonprofits and lenders. "It was a natural evolution from guarantor, to lender, to service provider," NorthStar Chief Financial Officer Jamie Wolfe said in the release. As of July 2009, NorthStar managed a $650 million private loan portfolio with 27,000 borrowers and had $6.6 billion in assets, according to its website. NorthStar refused to comment on the case or its new lines of business.

Borrowers with questions can visit www.northstarloansettlement.com.

Kara McGuire • 612-673-7293