After Dr. Melinda Smith graduated from the Michigan State University (MSU) College of Veterinary Medicine in 2007, she diligently marked her calendar each time she made a payment toward the $118,000 she owed in college loans.  

She wasn’t just keeping records — she was counting. She expected that once she made 36 on-time payments, her interest rate would drop to zero, and a huge obstacle to getting out of debt would be lifted.  

Like so many students in Michigan who took out loans between 2003 and 2008, the majority of Smith’s loans automatically qualified for the Michigan Students First subsidy, a program that promised students zero percent interest after making their first 36 monthly payments on time.

“All my financial planning was based on this,” Smith said. “We knew it would be tight for the first few years after vet school, and then the payments would go down. My plan at the time was to put even more toward it each month and get out of debt.”  

But in June 2010, just when Smith was on the brink of qualifying, the Michigan Finance Authority (MFA) terminated the benefit, citing the economic downturn and changes in federal legislation. She was on payment 33.  

“I cried,” she said. “I called them and ... I was begging and pleading, saying, ‘Can’t I just make my last three payments now and get the zero percent?’ ”  

Now Smith is one of tens of thousands of former students who might be eligible for compensation in a proposed $11.5 million class-action settlement between student borrowers and the MFA. If the settlement receives approval at its final hearing Wednesday in the Michigan Court of Claims, eligible borrowers would receive up to $1,200 — not exactly a windfall for those who are now paying thousands of dollars each year in unexpected interest.  

The Michigan Students First program was first announced in 2002 by the Michigan Higher Education Student Loan Authority, an agency under the state Department of Treasury and now known as the MFA. It aimed to make college more affordable for students.   

Federal Stafford and PLUS loans held by the MFA automatically qualified, and students such as Smith periodically would receive letters from their loan servicers stating that as long as they made 36 on-time payments, didn’t default on their loans and didn’t consolidate, their loans would become interest-free.

In June 2010, Smith received a different letter with very unwelcome news. It was from the Michigan Higher Education Student Loan Authority, stating that as of the end of the month, her loans would not be eligible for the interest subsidy. The reason: “The economic downturn and the negative impact of certain federal legislation have left funding insufficient to continue offering borrower benefits.”

The program was funded in part by federal dollars and through bonds. In the letter, the agency explained that due to the credit crisis, rising interest and the College Cost Reduction and Access Act of 2007, which reduced subsidies to education lenders, it no longer could afford the program.

In May 2013, student-loan recipients Hans Kiebler and Donovan Visser filed a class-action lawsuit, saying the MFA had illegally terminated the Michigan Students First program, breached the terms of its student-loan contracts and harmed at least 100,000 borrowers by forcing them to pay higher interest rates than expected.  

After what was described in the settlement notice as “vigorous” litigation, the parties proposed a settlement, with the MFA admitting no wrongdoing.  

The attorney for the MFA could not be reached for comment. Court documents show that the MFA argued it had the right to discontinue the program at any time and had expressly stated that in brochures and on websites.  

The court document also states that “given the economic reality that had developed,” the agency could have defaulted on its bonds and caused “significant financial harm” if it had continued providing the subsidy.  

The borrowers maintain that the benefit should have been terminated for future loans, but not for those who had already planned on the zero percent interest rate and were well on their way to making the required on-time payments.  

Under the proposed settlement, borrowers are eligible for compensation if they have loans still held by the MFA and serviced through Great Lakes, Nelnet or Sallie Mae, which likely includes many veterinary students who went to school in Michigan.  

The MSU veterinary program has roughly 100 students per graduating class, many of whom take out loans to pay for school. According to the American Veterinary Medical Association, the average educational debt of a veterinary-school graduate in 2013 was $162,113.  

In particular, the settlement affects alumni who graduated between 2007 and 2010 who didn’t have the chance to squeeze in 36 monthly payments before the program ended.  

Compensation ranges from $50 to $1,200, depending on the original amount borrowed.  

Caleb Marker, the class counsel, said he couldn’t comment on the case while it is pending, but explained that the purpose of the final hearing Wednesday is to confirm that the settlement is a fair resolution.  

The Michigan Court of Claims will consider any objections during the hearing. Class members had until June 16 to file an objection and explain why they don’t like the settlement or to exclude themselves in order to reserve the right to sue.  

If class members did neither and are eligible, they automatically will receive compensation.  

Regrets for trusting the offer

As they wait for a potential check that barely scratches the surface of their looming student loan interest, some look back and wish they hadn’t put so much faith in the benefit.  

A lot of students said, "No way am I banking on that program,” Smith said. “Unfortunately, that was the wiser course of action.”  

Some veterinarians received notice of the settlement via email — Smith’s notification was waiting in her spam folder — while others were unaware until they read about it on a message board of the Veterinary Information Network (VIN), an online community for the profession.

Many receiving the offer of compensation find it small comfort, or worse.  

“I felt insulted,” said Dr. Jennifer Miller, a small animal veterinarian who was in school when the program ended. “It’s a lousy deal all around.”  

It’s insulting, Miller said, because the compensation nowhere matches the hardship that resulted from the termination of the program and the financial plans that were foiled.  

Miller and Smith both said that they made important life decisions based on the program.

Miller said she wanted to be a large animal veterinarian, but couldn’t see any way to afford it.  

“We suddenly had a much larger loan than we were expecting,” she said in an interview by email. “And it had ripple effects on how we bought our home, planned our family and chose our jobs … this threw a big wrench in some carefully laid-out plans.”  

Miller has turned to a federal program called Income Based Repayment to pay off her loans. Wiithout it, she said, her monthly payments would be unmanageable.   

Interest can be a huge hindrance to paying off student debt, significantly raising monthly payments and extending repayment years into the future. Smith’s tax return for 2008 shows that she spent roughly $8,500 in interest on three loans. For graduate students, interest rates on Stafford and PLUS federal loans disbursed between 2006 and 2010 range from 6.8 percent to 8.5 percent.

Dr. Julia Underwood, who graduated in 2010 from MSU with $177,000 in loans, said she spent nearly two years in forbearance during her internship and job hunt, and her balance swelled with accrued interest. She wrote on the VIN message board that after more than two years of making loan payments, she still hasn’t been able to pay off that interest.  

For Smith, a series of decisions she made in expectation of receiving the program benefit left her with the short end of the stick.  

Consolidating loans would disqualify borrowers from the interest subsidy, so Smith repeatedly chose not to consolidate during veterinary school, even when she could have locked in low interest rates.  

“That was the biggest way my decision-making was affected,” she said. “I always turned it down.”  

After graduation, Smith’s parents helped her and her husband with a down payment on a house. In retrospect, she said, that money would have been better spent paying off her higher-interest college loans.  

The real clincher, she said, is that she took a six-month grace period after she graduated before she began making payments, which is what a consultant at Great Lakes advised.

If she hadn’t taken the grace period, she would have made the 36 payments in time to receive the benefit.  

Among the veterinarians who discussed the settlement on the VIN message board, several don’t qualify for compensation. Loans that have been consolidated or paid in full do not count toward the total original loan amount upon which the compensation is based, and only loans still held by servicers Great Lakes, NelNet and Sallie Mae are eligible.  

Underwood and Miller consolidated their loans after they found out about the termination — a move the state recommended in its cancellation letter — and some of Underwood’s loans were switched from Great Lakes to Direct Loans partway through veterinary school.  

“It’s frustrating because I was still affected by this,” Underwood said. “As far as vet school, I bet a lot of us probably consolidated our loans.”  

Smith has managed to pay off her biggest federal loan in full, which means she won’t be receiving compensation for it. With a balance of about $50,000, she likely will receive about $400 from the settlement.  

“I’m not going to turn my nose up at $400, but it’s not even the money I would have saved in one month of interest payments,” she said.

Update: Michigan Court of Claims Chief Judge Michael Talbot gave final approval on July 2 to the class-action settlement.