Consumers Cannot Be Penalized for Paying Student Loans Early
Paying extra monthly or making a lump sum payment will pay debt faster, save on interest charges
Millions of people across the country are working hard at the same task every month: paying off student loans. Most make their payments on time to their student loan servicers (the company billing them), and many add in an extra amount to try to get ahead on paying off the loans.
Every consumer who borrowed a student loan has the right to make such extra payments—which are known as prepayments—at any time without being charged any fees or penalties for doing so. It is a good practice for those who can afford to pay a bit extra per month or put down a lump sum payment toward their principal: not only will they get rid of their debt faster, they will also save money on interest they would have been charged over time.
However, the Consumer Financial Protection Bureau (CFPB) is concerned that some student loan services may be trying to make it harder for those borrowers who have made such extra payments to get ahead.
Several consumers have reported being sidetracked by their student loan servicers after making such payments. They claim that the servicers, often without the knowledge or consent of the borrowers, lowered the monthly payment amounts and thereby extended the repayment period and thus the amount of interest the borrowers would pay.
Although many would be glad to see a lower monthly payment on their student loans, if these consumers were to pay according to the servicers' new billing statements, they would be making smaller payments over a longer period of time. This could increase the total cost of their loans by hundreds of dollars.
This reset of the borrowers' loan repayment schedules that in turn causes monthly payment amounts to change is known as a "redisclosure" of repayment terms. It can happen for several different reasons. It can be triggered by changes to servicers' computer systems, for example, or by the transfer of a consumer's loans to a different servicer.
Many borrowers are not able to add extra amounts to their monthly repayment, and there is nothing wrong with that. As long as they pay the exact monthly payment amount every month, these borrowers will pay their balance on time and on schedule. If, however, they are able to afford to pay a little extra, here are some tips to follow:
- Ensure that you are still on track to meet your goals. Check your monthly statements and your account's payment history (usually available free of charge on your servicer's website). Any consumer who is trying to pay his or her loans more quickly and finds that the servicer has lowered his or her monthly payment amount can instruct the servicer to reset the amount back to the desired amount. Alternatively, he or she can choose to make more payments every month.
- Direct your servicer on how to allocate your extra money. Consumers who pay extra on their loans through automatic payments on a regular basis should contact their servicer to request the establishment of a standing instruction on their account to direct the extra money to go where the borrowers want it to go. They can also give such instructions when making individual payments. It may be necessary to contact the customer service department at the servicer directly either by phone or email in order to set up payment preferences, particularly for consumers who have been making automatic payments in the past. It is also necessary to make sure that the extra payments are not advancing the due date and causing the servicer to provide a "payment holiday," which can cause the borrower to go several months without making a payment and cost more in interest charges in the long term.
- When in doubt, ask. If you receive a surprise bill for a payment amount that is lower than the amount you were paying before, contact the servicer and request that the previous repayment schedule be reinstated. If the servicer gives you any trouble about this, submit a complaint to the CFPB.