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/
