Student loan early payoff a quagmire
Even when student loan borrowers scrimp and save to throw more than the minimum monthly payment in the mail, they are not getting much benefit, according to the feds.
While the feds often celebrate prepayments as evidence that you can rid yourself of your student loans quicker by making them, it does not happen, because the private companies managing the student loan payment process are making it harder.
The Consumer Financial Protection Bureau, or CFPB, has been receiving complaints from borrowers who say that after they intentionally overpaid on their student loans in an effort to lower the principal on the loan, their servicer lowered their monthly payments and stretched out their repayment term without their knowledge, the bureau’s student loan ombudsman, Seth Frothman, wrote in a blog post on the regulator’s Web site.
That means that if these borrowers paid their loans according to the new billing schedule, they would wind up paying more in interest over the lifetime of the loan.
The complaints are just the latest in a slew of concerns the CFPB and others have expressed about the student loan servicing industry, which critics say does not provide borrowers with enough or the right information to pay off their student loans successfully and in the most efficient way possible.
Prepayments — or paying more than the monthly bill — are often a source of angst for borrowers.
In the past, borrowers have complained that servicers don’t apply the extra money to the principal of the loan, which would lower the overall cost of the loan by preventing more interest from accruing, without explicit instruction.
Critics have also accused servicers of making life more difficult for borrowers who can’t afford their monthly payments by pushing them into forbearance — a status that allows borrowers to postpone payments while interest builds — instead of putting them into payment plans that allow them to cap monthly payments based on income.
The CFPB advises borrowers who are making prepayments to check their statements to make sure they’re still on track to repay their loans as quickly as they expected. If that’s not the case, they can ask their servicer to put their monthly payments back at the higher level.