Lenders Are Making it More Difficult to Pay Off Your Student Loans


Recent reports have uncovered a disturbing trend: student loan lenders are making it harder for borrowers to pay off their debt early. Payments are being distributed inefficiently and costing borrowers hundreds (potentially thousands) in interest.

When a borrower makes any extra payment above the minimum, the surplus is being distributed evenly across loans instead of being applied to the loan with the highest interest rate. It’s the default repayment system for most student loan servicers but it also means that extra or early payments may not be doing any good for borrowers looking to pay off their debt early.

The Consumer Financial Protection Bureau recently released a report summarizing the most common complaints held by consumers towards their loan servicers. High on the list was the frustration with above-the-minimum payments being spread evenly between loans rather than being allocated to the highest interest loan.

Other complaints include:

  • lack of clear communication as to how payments were being handled
  • difficulty in obtaining verification of payments that were made by mail or phone
  • large sum payments being credited to future payments rather than applied to the current balance

These complaints indicate a heightened frustration with an already challenging system. If you feel your payments aren’t being applied to your benefit, here are a few steps you can take to make sure your payments are working to your advantage:

Study Your Statements

If you’re worried that your payments aren’t working for you efficiently, especially if you’re making extra payments above the minimum payments, the first place you should look is your latest payment statement. Your statements reveal exactly where your payments have been distributed and also provide you with information about your accounts. Many borrowers may not even be unaware that their payments aren’t being distributed in the most beneficial way.

Call Your Loan Servicer

If your extra payments are being distributed among your loans equally, or early payments are being credited to future bills rather than applied to your current balance, call your servicer. If they’re unable to update your payment distribution preferences over the phone, they may at least be able to tell you what steps you can take to do so. It’s also an excellent opportunity to talk about any confusion you might have about the way your statements are organized, and to ask any questions that you might have about the details of your loans.

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Write To Your Loan Servicer

In most cases, a loan servicer will request that you write out and send your preferred payment allocation for early or extra payments. Include a sentence indicating that you wish to change your payment distribution, the details of your desired distribution and a personal signature. When specifying your loans, make sure to include the specific loan ID or/or account number. The Consumer Financial Protection Bureau has a sample letter that you can view or download here.

You can send via USPS or fax the document and once sent should apply to all future payments without additional letters or written instructions. But make sure to re-read and check for accuracy before sending it and check-in regularly to ensure that your instructions are being applied to your payments.

File a Complaint

If you’ve taken the above steps and are still finding your payments allocated incorrectly you can file a complaint against your loan servicer with consumerfinance.gov/complaint/.

Misapplied payments represent just one of the challenges faced by borrowers in repayment. Taking the time ensure payments are being allocated to your benefit can be time-consuming but the result is well worth it. Don’t forget to check out our Student Loan resource center for more tips on paying off student loans.

Image Credit kevin dooley

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