Many college students graduate with student loans. Many of these borrowers, though, don’t know that making sure they make payments is only one thing they should be aware of.
Recently, the Consumer Financial Protection Bureau (CFPB) elaborated upon “unfair, deceptive, or abusive acts or practices” by student loan servicers, the companies that collect payments on more than $1 trillion in student loan debt.
Here are five of the major problems that the Consumer Financial Protection Bureau continues to see. If you are one of the over 40 million Americans paying down your student loans, you should be aware of these ongoing issues.
1. Disadvantageous Allocation of Partial Payments
If you have more than one student loan, you may be paying them down through a combined account with one loan servicer. If this is the case, your servicer sends you a bill that sums the minimum monthly payment for each of your loans. If you pay less than the total minimum you owe and don’t tell your servicer how to allocate your partial payment, they may just divide it equally between your loans. When that happens, every single one of your loans will then be delinquent, and you may get hit with a late fee on each one.
A better strategy for allocating a partial payment might be to cover all of what is owed on the loans with the highest interest rates first, keeping them current. That way, you’ll only get hit with late fees on the loan or loans you are unable to pay, and those loans will have the lowest interest rates. In a report published in September, the CFPB said one loan servicer recently adopted this strategy as its default when it has no instructions from the borrower on how to distribute partial payments.
The CFPB says your loan servicer should be letting you know how they direct partial payments, and the potential ramifications of the servicer’s chosen method. Your loan servicer should also let you know that you have the right to direct payments to individual loans yourself as you see fit.
2. I Thought That I Paid That Loan Off...
Say you want to pay off the remainder of your student loan debt with a big lump sum payment. But what if you’re not completely up to date on what your outstanding balance is, and your lump sum payment is a few dollars short of what you actually owe?
“Many student loan servicers do not inform borrowers that the payoff attempt failed and cease communicating regularly with the borrower for a significant period of time because the borrower has paid enough to cover subsequent months and does not have a monthly payment due, even though a small balance remains on the loan or account,” the CFPB reports. “When this type of situation occurs, borrowers may be left unaware that a balance remains, resulting in months or years of interest accrual, tradelines remaining open in borrowers’ credit reports, and potential delinquency or default when monthly payments are again due months or years later.”
It’s a good idea when you pay off any loan to get written confirmation from the lender. If you’re refinancing student loans to take advantage of lower rates, you’ll need to obtain a payoff statement, a document showing your latest student loan balance that your current lender provides to the lender that’s refinancing your loan.
Click here for instructions on how to obtain a payoff statement from your lender.
3. Autopay High Jinks
Most loan servicers allow you to make automatic payments on the same day every month. If your servicer makes a mistake and takes money out of your bank account earlier than the scheduled date, you may get hit with overdraft or non-sufficient funds fees.
Another, more subtle, problem is if your payment is scheduled to be made on a day when the bank is closed — on a weekend or holiday — it often won’t be processed until the next business day. When that happens, some loan servicers are charging borrowers the extra interest that accrues for a day or two after you thought your payment would be made.
The amount of extra interest charged is so small you might not even notice, but the CFPB says that when you add up the impact across all borrowers using automatic payment, it constitutes “a substantial injury” that’s not outweighed by the convenience provided by the service. The CFPB says loan servicers should credit payments back to the due date, or make clear to borrowers using automatic payment that they extra interest can accrue.
4. Misrepresentation of Dischargeability of Student Loans in Bankruptcy
Although it’s not easy to get out from under student loan debt in bankruptcy court, it can be done if you can demonstrate “undue hardship.”
CFPB examiners had previously reported that some loan servicers were erroneously telling borrowers that student loan debt is not dischargeable in bankruptcy. The latest report details a new twist: at least one servicer has been advising borrowers who have already gone through bankruptcy that their student loan debt is not dischargeable. In fact, the CFPB says, borrowers “often have avenues to reopen bankruptcy cases or otherwise raise ‘undue hardship’ challenges to the enforceability of student loans.”
5. Misrepresentation of Late Fees
At least one loan servicer is telling borrowers that they may have to pay late fees on loans held by the Department of Education. Department of Education loan notes allow for the charging of late fees, but the government “does not, at this time, charge late fees on its loans and it instructs its servicers not to do so,” the CFPB said.
Kristen Caron is a member of the DailyWorth Connect program. Read more about the program here.