Discover Financial Services has been ordered to pay $18.5 million for illegal private student loan servicing practices.

According to the Consumer Financial Protection Bureau, the Illinois-based lender cheated more than 100,000 student borrowers by inflating minimum payments due on their loans, failing to provide them with information to obtain income tax benefits and violating federal debt collection laws.

The CFPB ordered Discover to refund $16 million to student borrowers and pay a $2.5 million penalty. The bank must also overhaul its billing, student loan interest reporting and collection practices.

“Discover created student debt stress for borrowers by inflating their bills and misleading them about important benefits,” said CFPB Director Richard Cordray. “Illegal servicing and debt collection practices add insult to injury for borrowers struggling to pay back their loans. [Wednesday’s] action is an important step in the bureau’s work to clean up the student loan servicing market.”

Discover’s student loan affiliates, The Student Loan Corp. and Discover Products, Inc., were included in the CFPB’s charges.

Discover acquired more than 800,000 student loan accounts from Citibank in 2010, according to the CFPB.

“As a loan servicer, Discover is responsible for providing basic services to borrowers, including accurate periodic account statements, supplying year-end tax information, and contacting borrowers regarding overdue amounts,” the CFPB said. “Discover failed at providing the most basic functions of adequate student loan servicing for a portion of the loans that were transferred from Citibank.”

In addition to duping borrowers into paying higher minimum monthly payments, which caused some borrowers to fall behind and pay late fees and penalties, Discover also misled thousands of borrowers by falsely telling them that they paid no interest on their loans so borrowers mistakenly thought they weren’t eligible for tax deductions. Borrowers will have to amend their 2011 and 2012 tax returns to claim student loan interest deductions.

The lender is also accused of placing more than 150,000 calls to borrowers at inappropriate times, such as before 8 a.m. and after 9 p.m. Some borrowers received dozens of calls during those off-limit times.

Discover is one of the largest lenders of private student loans in the United States, with a $9 billion portfolio of private student debt.

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Watch the video of ‘Discover Slapped for Cheating 100,000+ Student Borrowers’ on MoneyTalksNews.com.