Sallie Mae Sued Over Student Loans.

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A competitor of Sallie Mae earlier this month sued the nation's largest holder of student loans, alleging that it improperly denied borrowers the right to consolidate education loans with the lender of their choice.

College Loan Corp., which filed the lawsuit in federal court in Alexandria, Va., also alleged that Sallie Mae has illegally offered inducements such as free software to colleges and universities to get them to steer students to lenders that sell their loans to Sallie Mae.

College Loan, based in San Diego, is seeking an injunction against Sallie Mae and at least $200 million in damages.

"Sallie Mae has violated the trust placed in them by thousands of students and their families," Mark Brenner, College Loan's general counsel, said in a statement. "It is reprehensible that they are putting their pursuit of additional profits ahead of the rights of young Americans."

Kathleen deLaski, a spokeswoman for Reston, Va.-based Sallie Mae, declined to comment on the allegations in the lawsuit.

"We know that we comply with all regulations and policies," deLaski said. "We're a little perplexed that (College Loan) would complain about our service to borrowers when we offer students a better financial deal."

College Loan said Sallie Mae obstructed thousands of borrowers trying to consolidate student loans with other lenders and, in some cases, prevented them from getting lower interest rates.

In consolidation, borrowers with more than one loan at varying interest rates can combine them into a single, fixed-rate loan. Record low interest rates in recent months - with some student loan rates falling below 4 percent - have made consolidation desirable for many students.

College Loan's suit also alleges that Sallie Mae improperly diverted loan applications to its affiliates without borrowers' consent and attempted to pressure credit-reporting agencies into blocking its requests for borrower financial data.

Sallie Mae was a federally chartered enterprise before it became a corporation several years ago. It still buys many student loans from banks, but also makes loans directly to students and schools. It holds and manages more than $70 billion in student loans.