How to make extra student loan payments

Michelle Singletary
Columnist October 18, 2013

There’s been a lot of talk lately about debt.

Most of it has been about the federal debt burden. I want to shift the discussion to individuals, particularly those with private student loans. The student-loan ombudsman for the Consumer Financial Protection Bureau has released a report analyzing complaints the watchdog agency has received from borrowers with private student loans.

Michelle Singletary writes the nationally syndicated personal finance column, “The Color of Money.” View Archive

Not surprisingly, the chief gripe concerned payment issues. But it’s not what you might think. Many borrowers said they encountered problems trying to pay off their debt early.

We know that student loan debt has been rising at a troubling level. Outstanding education debt hit the $1 trillion mark in 2011. By last May, it approached $1.2 trillion, making student loans the second-largest form of consumer debt after home mortgages, says Rohit Chopra, the ombudsman.

The CFPB estimates that 7 million student loan borrowers are in default on federal and private student loans. It’s important to know the difference — federal student loans have many benefits, such as fixed interest rates and a number of repayment options, including income-based repayment plans. Private student loans typically have higher and variable interest rates and don’t have as many repayment options.

Many student-loan borrowers can’t refinance their student loans or have limited options. So to reduce their borrowing costs, they make extra payments. However, many said that when they tried to make extra payments on the private loans, their payments weren’t processed the way they wanted.

“Many consumers face stumbling blocks, snags, and surprises when it comes to payment processing practices,” Chopra wrote in his second report specifically addressing private student loans.

Some borrowers say they have trouble verifying whether payments were appropriately applied. Others noted that after submitting additional payments, the money was earmarked for future amounts due. Or they complain that extra payments intended to reduce their principal were instead applied to outstanding fees and interest.

Paying more than is required is often complicated because borrowers have three or four loans bundled into a single account. The CFPB analyzed more than 3,000 complaints submitted from October 2012 through September 2013. Chopra cautioned that the complaints are not based on a representative sample and may not reflect widespread problems. Nonetheless, the borrowers’ experiences highlight problems similar to what we saw in the mortgage industry.

Other complaints included problems with getting accurate payoff information. Some consumers said they received conflicting payoff amounts from different customer-service representatives. Others reported obtaining a payoff balance, submitting the payment amount and thinking their debt was paid in full, only to find out that their payoff balance was incorrect and their account remained open.

Rather than simply issue a report listing the various complaints, the CFPB also issued an advisory that included a sample letter that borrowers can send to their servicer, the company that processes your loans, which may also be the lender.

In the letter, you need to clearly state that you are sending more money than is required and then tell the servicer how the payment is to be allocated.

If you have several loans with the same loan servicer and you don’t provide instructions, your servicer will generally decide how to allocate your payments. The result might not be in your best financial interest.

The sample letter notes that borrowers can ask that any money over the minimum amount due be applied to the loan that is accruing the highest interest rate. If you have multiple loans with the same interest rate, tell the loan servicer to apply the additional amount to the loan with the lowest outstanding principal balance.

If any additional amount above the minimum amount due ends up paying off an individual loan, then you can direct the lender to apply any remaining part of the payment to the loan with the next-highest interest rate.

The good thing is that borrowers have an advocate. The legislation that created the CFPB also established an ombudsman for student loans. To submit a complaint, go to www.consumerfinance.gov/complaint. For additional questions about repaying student loans, the agency has a tool, “Repay Student Debt,” which lists several options for both private and federal loans. The URL for the sample letter is www.consumerfinance.gov/blog/category/student-loans.

Even if you’ve had problems paying more on your private loans than required, keep pressing. Keep complaining. It’s worth it in the end.

Readers can write to Michelle Singletary at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071, or singletarym@washpost.com. Personal responses may not be possible, and comments or questions may be used in a future column, with the writer’s name, unless otherwise requested. To read previous Color of Money columns, go to postbusiness.com.

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