Repaying a student loan should be simple. But a new report from the Consumer Financial Protection Bureau finds that's often not the case. Loan servicers, the companies hired by lenders to collect payment for private loans, don't always act in the borrowers' best interests. And loan servicers sometimes take actions that increase the total cost of higher education.
"When servicers process payments to maximize fees and penalties, they undermine the trust of their customers," said CFPB Director Richard Cordray in a statement. "Student loan borrowers deserve better; they deserve transparency and accountability."
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The most common complaints dealt with problems encountered by borrowers, trying to pay off their loans early or in a certain order.
It usually makes sense to pay off the loan with the highest interest rate first. But the CFPB found that loan servicers don't always do that. Instead, they frequently divide the payment or overpayment and apply it to all the person's outstanding loans.
According to the report, these "payment processing pitfalls" can lead to increased costs, prolonged repayments and harm to a borrower's credit profile.
"The net effect is that you won't save as much on the interest as you intended, and you won't be paying off your loans more quickly," said Rohit Chopra, student loan ombudsman for the CFPB. "This can be very frustrating for responsible borrowers who are just trying to pay off their student debt and honor their obligations."
The bureau also found problems for borrowers who had multiple loans with the same servicer and were not able to make their monthly payment in full. They were typically told to pay as much as they could. Again, rather than putting the entire payment toward the highest-rate loan, it was applied evenly to all of them.
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"This maximizes late fees and can exacerbate the negative impact of a single late payment to the borrower's credit profile," Chopra said.
Borrowers also encountered problems when their loans were transferred to another servicer. Complaints included lost paperwork; processing errors that resulted in late fees; and interruptions to routine communication, such as billing statements.