Discover Financial Services agreed to pay $18.5 million to resolve charges of illegal student loan collection practices. (AP Photo/Steven Senne, File)

Tens of thousands of student loan borrowers will receive refunds from Discover Financial Services after the government slapped the firm with $18.5 million in penalties for overstating the amount of money people owed and illegally harassing them to repay their debt.

In its first action against a student lender, the Consumer Financial Protection Bureau on Wednesday said Discover listed higher minimum payments than the ones outlined by the original terms of the loans. The government agency also said the company denied consumers information needed to get a tax deduction for the interest paid on their loans. The company is also accused of illegally calling borrowers at all hours and failing to provide them information about the amount and source of their debt.

“Discover created student debt stress for borrowers by inflating their bills and misleading them about important benefits,” CFPB Director Richard Cordray said, in a statement. “Illegal servicing and debt collection practices add insult to injury for borrowers struggling to pay back their loans.”

Under the agreement, Discover will return $16 million to consumers. About 130,000 people will be reimbursed up to $300 to amend their 2011 or 2012 tax returns to claim the student loan interest deductions or receive an account credit of $75 for each tax year. Roughly 5,200 borrowers who were misled about the minimum payments will receive a check or account credit for up to $500. And 5,000 people will either get $92 for receiving five to 25 unlawful collection calls or $142 for more than 25 calls.

Discover, the nation’s third largest private student loan lender, neither admitted or denied any wrongdoing. Officials at the company declined to comment.

Charges stem from Discover’s 2010 acquisition of 800,000 student loan accounts from Citibank. As a part of the deal, Discover began servicing the loans–collecting and applying payments. The company was responsible for providing borrowers with accurate account statements, supplying year-end tax information and contacting them about overdue amounts. But examiners at the CFPB say thousands of borrowers encountered problems.

Officials found evidence of the company placing more than 150,000 calls to borrowers early in the morning and late at night in violation of the Fair Debt Collection law. Even though Discover learned about the illegal calls in October 2012, the company didn’t address the problem until February 2013, according to the CFPB.

The bureau, which fined Discover $2.5 million, said the company also failed to inform people about their right to contest the validity of their debt, information that must be provided when debt collectors first contact a borrower with an overdue account.

Along with Wells Fargo and Sallie Mae, Discover is one of the few big financial firms that offers student loans. Citibank, JPMorgan Chase and other private companies exited the space after the government captured a majority of the market by choosing to expand its direct lending to students in 2010.

These days, private lenders only hold 7 percent of the $1.3 trillion in outstanding student loan debt, according to Measure One, a company that tracks private student loans.

Government regulators have grown wary of private loans because of their rigid terms. They generally carry higher interest rates and fewer protections than federal loans, and borrowers are often required to have someone else co-sign the agreement to ensure repayment.

[Private student loans may be more of a headache than you want]

A recent report from the CFPB found 90 percent of private student loan borrowers who applied to have the co-signer of their loan released from the contract were rejected. Without that release, co-signers run the risk of having their credit ruined if the borrower falls behind on payments. And the borrower could have their loan automatically placed in default if the co-signer dies or declares bankruptcy.

The bureau did not divulge the names of the lenders it reviewed, but officials from Sallie Mae and Wells Fargo have said their companies are always will to work with borrowers in distress. Private lenders have become more flexible in lowering interest rates and extending repayment periods for borrowers in dire straits.

Want to read more about private student loans? Check out these stories:

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