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Bureau concerned by student loan payment cut practice

By Tim Grant, Pittsburgh Post-Gazette
Published: October 23, 2016, 5:33am

PITTSBURGH — Some student loans borrowers who are trying to get free of debt sooner by paying a little extra each month or making a lump sum payment toward the principal are discovering that companies servicing their loans are making it harder to save money on interest charges.

The Washington, D.C.-based Consumer Financial Protection Bureau recently expressed concern over a practice used by student loan servicers known as “redisclosure” of payment terms. Redisclosure causes a borrower’s monthly bill to fall when extra payments are made.

After the monthly payment amount is reduced, the term of the loan is extended and the borrower could end up paying more interest over time if he or she only pays the lower minimum amount due.

For example, a borrower could start out owing $25,000 in student loans payable for a 10-year term with $300 a month payments. But if the borrower decides to pay $400 a month toward the loan and principal, some servicers will drop his monthly bill to less than $300 a month and possibly extend the term of the loan.

If the borrower decides to make the new lower minimum payment, it will take longer to pay down the debt and he’ll end up paying more in interest.

“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 loan and get out of debt,” said Mike Pierce, a CFPB official.

The CFPB did not offer any numbers that would suggest how many borrowers are affected by the practice. However, with 43 million people owing student loans, the issue could affect several million consumers — not just recent college graduates, but also people well into their 40s and 50s and beyond who are still chipping away at balances on their student debt.

Complaint filed

Loan servicers are private companies that manage student loans on behalf of the federal government and private lenders. They handle the billing and work with borrowers on repayment plans and loan consolidations. Borrowers cannot choose their own loan servicer. Student loans are assigned to a loan servicer by the U.S. Department of Education or whatever private lender granted the loan.

Consumers have filed complaints with the CFPB that their servicers extended the repayment period without the consumer requesting the change and, in some cases, without letting the borrower know the change was coming.

“(My servicer) just sent me notice they have automatically decreased my payment amount by half. This is without my consent,” one borrower told the CFPB. “In effect, (my servicer) is trying to double the length of my repayment and charge me the related interest.

“(My servicer) offers no way for me to manage the payment amount through their website or through their automated phone system. I can lower my payment through these automated systems, but I cannot restore my original, higher payment amount.”

Lynnette Khalfani Cox, author of “College Secrets: How to save money, cut college costs and graduate debt free,” said in some ways, what student loan servicers are doing is similar to what credit card companies did before the Card Act of 2009 established specific rules for how payments must be applied by card issuers, such as banks and credit unions.

She said, for example, a consumer might have a credit card balance with various interest rates involved — because different rates can apply to different transactions such as regular purchases, cash advances or balance transfers.

“Fortunately, today if you make an extra credit card payment beyond your minimum payment, that excess amount must go to balances with higher interest rates first,” said Cox, who is based in Mountainside, N.J., and is the founder of the website AskTheMoneyCoach.com.

Previously, she said, most banks would apply all extra credit card payments beyond the minimum to the lowest interest balances first. That had the effect of extending the amount of time it took people to pay off credit card debt.

Cox was not aware of student loan servicers not applying extra payments toward reducing interest charges, but said borrowers should be concerned about such practices.

“You don’t want student loan repayments to limit your ability to save for retirement or pursue other goals as you get older,” she said. “So it’s wise for borrowers to try to aggressively repay student loan debt as quickly as possible.”

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