Capt. Lyndsey Olson had little time to organize her personal finances during her year at the Joint Base Balad in Iraq, which was hit so often by mortar fire that soldiers called it "Mortaritaville."

But Olson claims that Citibank made a difficult situation worse by illegally altering terms of her student loan.

Now Olson, a member of the Minnesota National Guard, is suing Citibank in federal court in Minneapolis, accusing the bank of penalizing military personnel by placing their loans into "mandatory forbearance," which can add hundreds of dollars in interest over the life of a loan.

"Why penalize people for serving their country?" asked Olson, 34.

Citibank argues that forbearance is a benefit because it relieves soldiers from making payments while they are on active duty. This gives service members "additional time and flexibility to repay their debts," the bank said in court documents.

The suit, which seeks class action status, could affect thousands of U.S. military personnel who took out loans before their deployments to combat zones. It comes as reports of violations of a federal law designed to protect military personnel surface nationwide, and as congressmen consider new protections for military families that face financial hardship.

At issue in Olson's case is whether a lender can unilaterally change the terms of a loan when a service member is called up for active duty and seeks protection under a federal law known as the Servicemembers Civil Relief Act, or SCRA. The 70-year-old law provides a broad array of protections for service members deployed overseas, including a 6 percent rate cap on loans taken out before active service.

Olson said she contacted Citibank to have her interest rate, 9.25 percent at the time, capped at 6 percent. Citibank agreed to the rate cap, while placing her loan into forbearance and canceling the automatic payment feature on her loan. When she called to complain, Citigroup said that forbearance was required if she wanted to receive the lower interest rate.

As a result, Olson was forced to arrange loan payments from a combat zone and returned from Iraq with a larger debt burden than if she had not applied for relief under the SCRA. "Citibank is taking a population that is worthy of protection and turning it into a moneymaking scheme," she said.

Citibank tried to have the case thrown out, but U.S. District Judge Paul Magnuson denied that motion. Without ruling on the case, he said the bank's policy of putting loans into forbearance makes it more difficult for active-duty service members to track their loan balances. He ruled that, "the spirit, if not the letter, of the SCRA prohibits changing the terms of a service members' loan when that service member avails herself of the protections" of the act.

A spokesman for parent company Citigroup declined to comment on the case, but said in a written statement that the bank "has a longstanding commitment to complying with [SCRA] and the protections available to military personnel."

The suit is the latest in a series of recent legal cases and complaints involving alleged violations of the civil-relief act, a federal statute that many lenders still don't fully understand.

Last month, J.P. Morgan Chase & Co., the nation's second-largest bank, admitted it had overcharged 4,500 service members on their mortgages, after an internal review. Congressmen are now weighing new legislation to protect service members from losing their houses or being charged punitively high interest rates while they are on forced absence.

In response to reports of lender abuses, the new consumer watchdog agency created by Congress recently created a special division, called the Office of Servicemember Affairs, that will protect military families from financial scams. The division is headed by Holly Petraeus, wife of Gen. David Petraeus.

"Protecting our service members from suffering devastating financial repercussions from answering the call to service is not only the right thing to do -- it is also important to our national security," Petraeus told a House committee on veteran affairs this month.

Why not optional?

Olson argues that Citibank stands to gain financially by making it difficult for military personnel to make payments while they are deployed overseas. Under the bank's forbearance plan, unpaid interest accrues and then is added to the loan balance when the soldier's active-duty period ends. So Citibank is able to collect interest on a larger sum of money.

Olson was able to make some payments from a computer at the base, but limited time and unreliable Internet access made that difficult. The base in Balad received daily artillery hits. Olson said she was occasionally jolted awake by explosions.

"I'm thinking about the guy sleeping in a mud hut in enemy territory in Afghanistan," said Olson, who served in Iraq for a year. "Tell me whether that guy can get on a computer to pay a loan. That's why these laws exist."

Olson's attorney, Vildan Teske, estimates that "several thousand" military personnel have paid excessive interest as a result of Citibank forcing loans into forbearance, then adding accrued interest to their loans, based on preliminary research.

In his recent ruling, Magnuson said Citibank's forbearance policy -- by adding unpaid interest to the principal -- raised the borrower's "effective interest rate," by increasing the principal and the interest charged on the principal. Magnuson said Citibank had failed to explain why it requires certain loans to be put into forbearance, rather than making it an option.

John Odom, a retired U.S. Air Force judge advocate general currently practicing law in Shreveport, La., said lenders routinely impose extra conditions on military personnel who seek to have their rates reduced under SCRA.

"The whole purpose of the act is to keep the war fighter focused on fighting the war," Odom said. "You don't want someone in a foxhole, or working on a fighter jet, worrying about making payments on a student loan."

Chris Serres • 612-673-4308