Consumer Financial Protection Bureau Warns Student Borrowers: Paying Extra on Loans May Not Help You Pay Them Off Early

OK, let's assume for a few moments that you are a super responsible student-loan debtor who wants to pay off your college loans early and get on with your life.

And let's assume you have a few extra bucks at the end of the month and you want to make larger monthly payments on your student loans so you can reduce the principle faster and pay off your loan more quickly. That should work, right?

Maybe not. The Consumer Financial Protection Bureau issued a warning recently that some student borrowers who pay more than the minimum monthly payment on their loans may actually be extending the period of their indebtedness.  

According to the CFPB, some student borrowers have reported that their loan servicers are thwarting borrowers who try to pay off their loans early by making larger payments.. In fact, some servicers have constructed a loan collection system that penalizes people who may more than the minimum monthly payment.

How does this system work? In some cases, loan servicers have unilaterally lowered borrowers' minimum monthly payments, thereby extending these  borrowers' repayment period and the amount of interest that borrowers pay, and they have often done this without the borrowers' knowledge.

This arbitrary practice of resetting borrowers' monthly payment amounts is called "redisclosure," and the CFPB warns borrowers that they could trigger redisclosure by making extra payments to pay their loans off sooner.

As CFPB's Mike Pierce explained:

When borrowers pay more than they owe, they expect to save money on interest charges and get out of debt faster. But the practice we highlighted can hold these borrowers back, making it harder and more expensive for student loan borrowers to pay back their loans and get out of debt.

Of course the practice of impeding college borrowers from paying off their loans early is outrageous and should be illegal. But CFPB places the responsibility on the borrower to avoid being duped. Here is CFPB's advice:

1) "Double check to make sure you're still on track to meet your goals." In other words, check to see if your servicer lowered your monthly loan payment without your knowledge.

 2) "Tell your servicer what to do with your extra money." Make sure the extra money goes to             paying down your loan with the highest interest rate and that extra money goes toward paying down principle.

3) If something doesn't look right, ask for help."

Of course, this is good advice, but wouldn't it be better if the CFPB simply required student-loan servicers to do business honestly and transparently? Shouldn't borrowers be able to pay off their student loans early by making extra payments? And shouldn't servicers be prohibited from changing payment terms without the borrower's permission or knowledge?

References

Tim Grant. Financial protection bureau concerned by some student loan servicers' practices. Pittsburgh Post-Gazette, October 3, 2016. http://www.post-gazette.com/business/money/2016/10/03/Be-cautious-when-repaying-student-loans/stories/201609280032

.Seth Frotman. You have the right to pay off your student loan as fast as you can, without a penalty. Consumer Financial Protection Bureau, September 26, 2016. http://www.consumerfinance.gov/about-us/blog/you-have-right-pay-your-student-loan-fast-you-can-without-penalty/

Say it ain't so, Joe! Penn State coach Joe Paterno was in bed with Bank of America

According to a story in the Pittsburgh Post-Gazette, Penn State football coach Joe Paterno--Penn State's beloved "Joe Papa"--signed two $100,000 contracts to promote Bank of America products and sign some football helmets and footballs.

Jerry Sandusky and Joe Paterno
Photo credit: Paul Vathis/Associated Press

Apparently, Joe's $13 million pension, his access to a private jet, and his million dollar salary were not enough for him.  He had to sign on as a shill for Bank of America. No wonder he didn't spot Jerry Sandusky seducing little boys in the Penn State locker room.  Joe was too busy autographing footballs.

And the alumni association for Penn State University, Joe Papa's employer, also had a special deal with Bank of America. According to the same Pittsburgh Post-Gazette story, Penn State received more than $2.7 million in fees and royalties  from a deal to help a Bank of America subsidiary market high-interest credit cards to Penn State students and alumni.

Penn State's alumni association received a "1 percent kickback royalty" on retail purchases made by Penn State alumni on the Penn-State branded card and the association got 0.5 percent of purchases made by Penn State students.

Of course, both deals were confidential. We would not know about them were it not for a 2009 federal law that requires colleges and universities to file copies of their agreements with credit card companies with the Consumer Financial Protection Bureau. At one time, more than a thousand colleges and universities had deals with credit card companies. Today that number has dropped to about 600.

According to the Consumer Financial Protection Bureau, some universities made millions on these deals, but others got very little.  The University of St. Thomas, a Catholic university in Houston, Texas, only made $2,365 on its credit card deal in 2012. Why sell your soul for peanuts?

The Pittsburgh Post-Gazette story is another indication of the corporatization of American colleges and universities. Instead of focusing on their mission, which is to provide students with a high-quality education at a reasonable price, they wandered into the banking business, taking kickbacks from credit card companies in return from helping them peddle high-interest credit cards to college students.

This tawdry tale provides yet another reason for a federal open-records law that would require all colleges and universities that receive federal student-aid money to make all their records available to the public.

References

Associated Press. Joe Paterno earned $13.4M pension.  ESPN College Football, May 22, 2012. Accessible at: http://espn.go.com/college-football/story/_/id/7959425/joe-paterno-earned-134m-pension-penn-state-nittany-lions

Jo Becker. Joe Paterno Won Sweeter Deal Even as Scandal Played Out. New York Times, July 14, 2012. Accessible at: http://www.nytimes.com/2012/07/14/sports/ncaafootball/joe-paterno-got-richer-contract-amid-jerry-sandusky-inquiry.html?_r=0

Consumer Financial Protection Bureau. College Credit Card Agreements. Accessible at: http://www.consumerfinance.gov/credit-cards/college-agreements/

Tim Grant. Penn State leads U.S. in earnings from collected credit card royalties. Pittsburgh Post-Gazette.com, January 11, 2013.  Accessible at: