Repaying Private Student Loans: Watch Out For These Pitfalls
A CFPB study documents many problems with the way private student loan servicers process payments.
Paying your private student loans isn’t always straightforward. According to a recent study, borrowers with private student loans cite numerous problems related to making loan payments. Private student loan servicers frequently lose payments, misapply funds when borrowers try to pay down their loans more quickly, fail to notify customers when accounts are transferred to new servicers, and engage in other practices that undermine borrowers’ ability to get information about and pay their loans.
If you have private student loans, learn about common payment processing pitfalls and what you can do to avoid problems with your account.
Prevalence of Private Student Loans
More and more students are forced to take out private student loans (sometimes called “private label loans”.) As the cost of attending higher educational institutions rises, federal grants and loans don’t come close to covering the bill. And for those attending vocational schools, private student loans are sometimes the only option.
Private student loans have high interest rates or come with variable rates that can skyrocket down the line. And unlike federal student loans, private loans are not eligible for the many flexible federal repayment programs or forbearance programs for borrowers experiencing financial hardship. (Learn more about the disadvantages of private student loans.) This means that when it comes to repayment, private student loan borrows are at the mercy of the loan servicers.
Many private student loans are “serviced” by companies other than the company that holds the loan. Servicers handle payments, loan payoffs, and loan modifications. It’s common for a student loan holder to change servicers in the middle of your repayment period, or to sell off your loan to another company, who then might use a different servicer.
CFPB Report on the Private Student Loan Industry
The private student loan ombudsman of the Consumer Financial Protection Bureau (CFPB) releases an annual report analyzing the complaints it receives about private student loans. In the 2013 Annual Report of the CFPB Student Loan Ombudsman, which covered complaints filed between October 1, 2012 and September 30, 2013, the ombudsman noted some major problems with the way that student loan servicers process payments. Because the student loan servicers are falling down on the job, consumers
- don’t get the information they need
- end up paying more in interest and fees
- have trouble paying their loans off early, and
- experience other frustrations.
Here are some of the most commonly cited problems.
Services Make it Difficult to Pay Off Loans Early
Because private student loan borrowers pay high interest and cannot take advantage of federal repayment plans, they often try to pay down their private loans as quickly as possible. But when consumers send in extra money with their loan payment, it often doesn’t go towards principal. Instead, servicers will hold the payment for next month, called “paid ahead,” which doesn’t help in making a bigger dent in principal. Unfortunately, this sometimes happens even when the consumer sends specific instructions on what to do with the payment.
Servicers Pay Down Multiple Loans to Their Advantage, Not Yours
Many consumers have more than one private student loan and often each loan has a different interest rate and loan terms. The servicer often bundles these into a “billing group.” When a consumer sends in extra funds to pay down the principal, the servicer typically splits the funds between the loans, instead of applying them to the loan with the highest interest rate. Consumers say the information they get is confusing, so it’s difficult to determine exactly where the excess funds are going. And even when the consumer specifically directs that the excess funds go toward the loan with the highest rate, the servicer sometimes ignores this instruction.
Servicers Apply Partial Payments In Order to Maximize Fees and Late Charges
The same tactic happens when consumers send in partial payments. Servicers split the partial payment between loans, so that all of the loans generate a late fee, instead of just one or a few.
Servicers Lose Payments
Many consumers complained that servicers lost payments when they paid by check. Servicers then typically asked the consumer to provide a copy of the cancelled check in order to waive the late fee. But because banks cannot produce a cancelled check if the check itself is lost, consumers are unable to provide the requested documentation. This means that consumers end up paying late fees solely because of servicer errors.
Inaccurate Payoff Information
Consumers often have trouble getting payoff information. Some say they’ve gotten different payoff amounts for the same loan. And some say they discovered that the payoff amount was incorrect only when they later received calls from debt collectors, claiming they still had a balance due and owing on the account.
Delayed Time in Processing Online Payments
Many private student loan servicers take up to ten days to process online payments. Consumers, used to quick processing from banks and most other businesses, find this frustrating.
Inaccurate Online Payment Histories
Student loan servicers admit they don’t post payments made by mail or by phone to the borrower’s online payment history. So consumers looking at their account payment history are missing crucial information.
No or Delayed Notice When Accounts Are Transferred to Other Servicers
According to the CFPB report, many consumers complained that they got no, or much delayed, information when their account was transferred to another servicer. Because of service interruptions, people sent payments to the old servicer, followed payment protocols of the old servicer, or couldn’t find out where to send payments to the new servicer – which often meant they had to pay late fees or risk account delinquencies. Some borrowers also complained that the new servicer charged different interest rates, changed monthly payment amounts, and increased late fee charges.
What You Can Do to Avoid or Fix Payment Processing Problems
Knowing what can go wrong is a good first step to avoiding or fixing problems. You know what to look out for, and may be able to head off trouble in advance. Below are additional suggestions for protecting yourself and remedying problems.
Put Everything in Writing
The best policy when handling your private student loan accounts is to document everything in writing. If you send in extra funds, include specific instructions on how they are to be applied. Do the same if you send in a partial payment. If you request a payoff amount, put the request in writing or if you get an amount over the phone, send a letter documenting your phone call and the amount that was provided to you.
The CFPB has a sample letter you can use when you are sending in a payment with excess funds. You can find that letter in the CFPB’s recent consumer advisory on private student loans.
This may head off some problems. And if it doesn’t, you at least have a record of what transpired.
File a Complaint With the CFPB
If you submit an online complaint with the CFPB, the private student loan ombudsman’s office will assist you in resolving it. So if you can’t sort out payment issues with your private student loan servicer, let the CFPB know. You can submit a complaint by visiting www.consumerfinance.gov/complaint.