Student loan switcheroo extends loans and costs borrowers

By Tim Grant

Pittsburgh Post-Gazette

Some borrowers who try to get free of student-loan debt by paying extra each month or making a lump sum payment toward the principal discover that companies servicing their loans sometimes make it harder to save on interest charges.

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

The monthly payment amount is reduced, but 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 minimum amount due.

For example, a borrower could start out owing $25,000 in student loans over 10 years with payments of $300. 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 beyond 10 years.

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,” said Mike Pierce, a CFPB official. “But the practice we highlighted can hold these borrowers back, making it harder … for student loan borrowers to pay back their loan and get out of debt.”

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

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 a loan servicer. Student loans are assigned to a servicer by whatever governmental or 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 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 founded the website AskTheMoneyCoach.com.