If you're aiming to zero out your student loans ahead of schedule, pay attention to how your loan servicer handles those extra payments.
The Consumer Financial Protection Bureau announced Wednesday it is suing federal and private student loan servicer Navient, saying the company has been "systematically and illegally failing borrowers at every stage of repayment." Attorneys general for Illinois and Washington state, who had teamed up with the bureau on the multi-year investigation, filed their own suits against Navient Wednesday.
Among the CFPB's charges, Navient — formerly part of Sallie Mae — allegedly steered struggling borrowers into forbearance when they might have qualified for income-driven repayment plans, and did not adequately keep borrowers in income-driven plans informed of critical deadlines to maintain their eligibility.
Borrowers aiming to get ahead on their loans by making extra payments may also have been burned. The suit alleges Navient often processes such payments incorrectly, resulting in late fees, interest charges and negative reports being sent to credit reporting agencies.
"Navient repeatedly misapplies or misallocates payments — often making the same error multiple times over many months," the CFPB said in its announcement. "The company all too often fails to correct its errors unless a consumer discovers the problem and contacts the company."
In a statement released in response to the CFPB's suit, Navient said the allegations are unfounded and politically motivated.
Payment processing issues accounted for 17 percent of all student loan complaints the CFPB received during the second quarter of 2016 — second only to complaints about income-driven repayment plans, according to an October report.
To make sure this strategy works in your favor, start by tracking down your servicer's policies on how payments are applied. (Navient's are here.)
"It's absolutely an important thing for consumers to know about, that they get their payment credited properly," said David Levy, editor of Edvisors.com.
For federal student loans, regulations stipulate any extra payment goes first to outstanding fees (like late fees), then to interest accrued since your last payment, and then to the principal of the loan, said Betsy Mayotte, director of consumer outreach and compliance for American Student Assistance, a nonprofit focused on higher education financing. Sometimes private loan servicers will apply any over-payment to your next month's payment instead of the principal, Levy said.
Where it can get confusing is that unless you request otherwise, servicers typically push back your next payment due date for every multiple of your monthly payment they receive, she said. (So if your regular payment of $100 is due in January and you send them $300, your next payment would be due in April.) If you're signed up to have payments automatically pulled from a checking account, it might mean the servicer won't draw a payment until your next due date — a move that negates the benefits of that extra payment.
If you have multiple loans with that servicer, your extra money will often be divided equally among them unless you specify otherwise, Mayotte said. It could also be applied to the loan with the highest-interest rate.
Depending on your servicer, you may be able to make elections online regarding how excess payments are handled, Levy said. Or you may need to do so in a letter sent in with your check. (The CFPB has a sample letter consumers can use.)
If you want the payment applied to a particular loan — say, the one with the highest interest rate — specify that loan number in your request, he said.
To ensure the payment is allocated according to your wishes, be prepared to reiterate those preferences every time you make an extra payment, Mayotte said.
"You're going to have to call or send an email or send a carrier pigeon every time," she said.
Monitor your account to make sure your instructions were followed, Levy said. Save copies of any correspondence, should you need to call the servicer to fix an incorrectly applied payment.