The Consumer Financial Protection Bureau (CFPB) recently expressed concerns over a practice that is being used by some student loan servicers known as “redisclosure” of payment terms. Redisclosure causes a borrowers monthly bill to fall when extra payments are made.
Experts believe that student loan servicers are using the redisclosure tactic to make it harder for borrowers to save money on interest. Once the monthly payment amount is reduced, the term of the loan is extended, causing the borrower to pay more in interest over time.
For example, if a borrower starts out owing $25,000 in student loans payable for a 10-year term with $300 monthly payments and decides to pay an extra $100 each month toward the principal, some loan providers will drop the monthly bill to be less than $300 per month to possibly extend the term of the loan.
“When borrowers pay more than they owe, they expect to save money on interest charges and get out of debt faster. But the practice we highlighted can hold these borrowers back, making it harder and more expensive for student loan borrowers to pay back their loan and get out of debt,” CFPB official Mike Pierce said.
The good news is that you can tell your loan servicer to set your monthly payment back to a requested payment amount, if you discover it has been lowered. You can also tell your service provider what to do with your extra money each month. For example, you can ask that a standing instruction be placed on your account so that the extra money you pay each month goes toward the loan with the highest interest rate.
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