Student loans – do not assume
There is no doubt that student loans can be troubling for both students and parents. And if you thought it was a pain to get those loans in the first place, just wait until you start making payments.
DEAR MARY: We are currently repaying our Parent Plus Loans. We are making the required minimum payment each month, plus an additional amount to pay down the principal.
When reviewing the accounts recently, I noticed that all of my payments for some of the months have been applied to the interest, whereas payments from other months have been applied to the principal and interest.
I have called two times to have my account reviewed and corrected. The supervisor said that the inconsistencies are due to how the automated system applies funds. If we pay ahead too far on one loan, the payments will no longer be paid to that loan, which then allows interest to accrue. I am appalled by how this lender is defrauding its customers. Can I report them to the Better Business Bureau or the state attorney general? — Holly
DEAR HOLLY: Of course you can report this lender to both offices. But I wouldn’t waste my time going that route if you actually want actions taken to fix these issues.
Here is the scoop on prepaying student loans:
All education loans, including federal and private student loans, allow for penalty-free prepayment. This means you can make extra payments to reduce the balance of the loan, or even pay off the entire balance early, without having to pay an extra fee.
When a lender receives payments on a loan, the payment is applied first to late charges and collection costs, then to outstanding interest, and if there’s anything left, to the outstanding principal. Any payment over the amount due (the total amount for late charges, collection costs and monthly installment as specified in the repayment schedule) is considered a prepayment.
But wait, there’s more!
Federal regulations allow the lender to apply a prepayment toward “future installments by advancing the next payment due date,” unless otherwise specified by the borrower. For this reason, it is important to include a note with any prepayment indicating that you want the prepayment applied to reduce the principal balance of the loan. Otherwise, the lender will treat it as though you have paid your next installment(s) early, and may delay the next payment due date(s).
My advice is:
Number 1: Include very clear written instructions with every payment. Do not assume that the person processing your payment will remember your instructions or any phone conversations from last month. Word the instructions as if it’s the person processing your payment’s first day of the job.
Number 2: Appoint yourself as the manager. Take charge to see that the payments are made properly according to the federal student loan repayment guidelines stated above, and properly credited. Think of the employees on the other end as your staff. Is this crazy? Not really. Someone needs to be in charge here, and no one cares more deeply about how this job gets done than you.
Number 3: When it comes to making payments on federal student loans — or any debt for that matter — do not assume anything. In these days of automated payment systems, do not assume that your payment will be processed by a human. Do not assume that anyone will be bothered to read that little note you included. Do not assume that your payment reached its destination by the due date. Basically, trust if you want — but always verify.
Number 4: Follow up every single month to make sure that your payment was processed exactly as you instructed. If it wasn’t, act quickly to have them correct their mistakes, and verify that they’ve corrected them.
Number 5: If, despite all of your efforts to follow the guidelines outlined above, you are unable to solve the problem, you can contact the Federal Student Aid Ombudsman Group, located in Washington, D.C., for help. Contact them online or by mail.
I applaud your diligence in repaying these loans. I have a feeling that you’re going to have an advanced “degree” in handling federal loans and college debt by the time you’re through!