Student loan borrowers are encouraged to make payments in excess of the amount due when possible, thereby reducing interest costs and paying off the loan sooner. But according to a recent report by the federal Consumer Financial Protection Bureau (CFPB), some borrowers attempting to follow this advice have had their intentions thwarted by loan servicers.
For example, if a borrower has multiple loans with a single servicer, it is best to apply the excess payment to the loan with the highest interest rate. However, servicers generally apply the excess payments either evenly across the loans or in pro-rated amounts based on each loan’s monthly amount due. Borrowers have complained to the bureau that servicers do this even when the excess payment is accompanied by specific allocation instructions. The report states that this practice may deny a borrower hundreds of dollars in savings over the life of the loan.
The report also notes problems with the opposite scenario, when a borrower makes an underpayment in a given month. When this happens, the servicer may either apply the payment evenly across the loans, potentially leaving all of them underpaid (and thus leaving the borrower with a higher number of delinquent loans), or apply it to one loan at a time, attempting to fully meet as many of the loans as possible.
