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If you pay more than the amount due on your student loans, you might be in for a surprise

Loan servicers might be doing something without telling you, and it might be costing you extra in interest payments.(iStock)

You’re throwing as much money as you can scrape together at your student loans, sending in a few extra dollars on top of the automatic withdrawals to pay down the debt a little faster. But a month later, you log into your account only to find that those additional payments made no difference toward your principal balance.

What gives? It turns out that the company handling your loans actually lowered the next month’s amount due — without telling you — and extended your repayment period, applying the extra money you sent in toward future payments instead of paying down the principal immediately. This sort of mishap is becoming a common complaint among student loan borrowers, according to the Consumer Financial Protection Bureau (CFPB).

The bureau is concerned that student loan servicers, the middlemen who collect and apply payments, are making it difficult for people to get rid of their debt.

“There’s been a strong focus on servicing breakdowns impacting struggling borrowers and failing consumers seeking to access affordable repayment plans,” CFPB student loan ombudsman Seth Frotman said. “We are seeing that problematic practices are more far-reaching and impacting consumers across the board.”

Servicers can reset loan repayment schedules and cause a borrower’s monthly payment to rise or fall, a practice known as redisclosure of repayment terms. This can happen when loans are transferred from one servicer to another, or when the company makes changes to its computer systems. More than 10 million student loan borrowers have had their accounts moved from one company to another since 2013, according to the CFPB.

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“In the past decade, student loan debt has ballooned into a $1.3 trillion crisis,” said Frotman, who wrote a blog on the subject Monday. “At the same time, companies have legacy infrastructure and servicing systems that may not have been updated or evaluated with the necessary consumer focus.”

He is concerned that if people pay based on the new billing statement the servicers send, they would be making smaller principal payments over a longer period of time, potentially paying more in interest than they should be and raising the total cost of their loans.

Frotman encourages borrowers to keep track of their monthly statements and payment history, and if the required payment amount is lowered, tell the servicer to reset that amount. For people who regularly pay extra and have automatic withdrawal, he recommends providing the servicer with instructions on how to apply the money. They can allocate extra money to the loan with the highest interest rate or spread it across multiple loans.

“Servicers want to help borrowers to successfully repay their student loan debt, and to help those who make additional payments to pay off their debt sooner and decrease their overall cost,”said Michele Streeter, of the Education Finance Council, a trade group representing nonprofit and state-based student loan servicers. “If a borrower is experiencing any difficulties, they should contact their servicer directly to resolve these issues.”

White House steps up effort to reform student loan servicing to stave off rising defaults

Government agencies have been working together to provide the 43 million Americans who carry $1.3 trillion in student debt more transparent information about the terms of their loans, account features and consumer protections. They are aiming to strengthen loan servicing by establishing a clear set of minimum standards, including the right of a borrower to receive accurate, consistent information from well-trained staff. There are no market-wide federal rules for how servicers are supposed to operate.

Navient spokesperson Patricia Christel said the servicing company has been working with the Department of Education for nearly two years to “develop clear and consistent guidelines based upon customer preferences, flexibility and innovation.”

Want to read more about the student loan servicing? Check out these stories:

D.C. would have more oversight over student loan debt collectors under council proposal

How the attempt to fix student loans got bogged down by the middlemen

A guide to paying off your student loans