When it Comes to Paying Federal Student Loans, Do Not Assume Anything

There is no doubt that student loans can be troubling for the debt that they create 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.

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DEAR MARY: We have Parent PLUS Loans that are currently in repayment, on which we are making the required payment each month plus an additional amount  which we have requested be applied to pay down the principal.

After reviewing the accounts recently, I noticed that some months all of my payments are being applied to interest only, other months they are applying various amounts to principal and interest.

For a second time I have called to have my account reviewed and corrected. The supervisor said it was due to how the automated system applies funds. If we pay ahead too far on one loan, it stops paying on that loan, which then allows interest to accrue. I am appalled how this lender is defrauding its customers. Can I report them to the BBB or the state’s attorney general? Holly

DEAR HOLLY: Of course you can report this lender to the Better Business Bureau and your state’s AG. But I wouldn’t waste my time going that route if it’s action you want on your account and your repayment plan.

Here is the straight 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 outstanding principal. Any amount beyond the amount due (for example, the late charges and collection costs and the 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 to “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 had paid your next installment(s) early, and may delay the next payment due date(s) as appropriate.

My advice:

1) Include a very clear written instruction with every payment. Do not assume that the person processing your payment will remember an instruction you sent last month or any phone conversations. Write this as though it’s the first day on the job for whomever is processing this payment.

2) Appoint yourself the Manager. Put yourself in charge to see that payments are credited properly and that everything is handled properly and according to the federal student loan repayment guidelines stated above. Think of the employees on the other end as your staff. Crazy? Not really. Someone needs to be in charge here and no one cares as deeply about how this job gets done than you.

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 automation, do not assume that your payment will be processed by a human. Do not assume that anyone bothered to read that little sticky note you included in the envelope. Do not assume that your payment reached its destination by the due date. Basically, trust if you want but always verify.

4) Follow up every single month to make sure that your payment was processed exactly as you have instructed. If it was not, as your own Manager, act quickly to see that the corrections are made. Then verify.

5) If despite all of your efforts to follow the guidelines outlined above you are unable so solve a problem with how your Parent PLUS or other federal student loan payments are being processed, you can ask the Federal Student Aid Ombudsman Group for help by contacting them online, by phone at 1-877-557-2575 or by mail: U.S. Department of Education, FSA Ombudsman Group, 830 First Street, N.E., Mail Stop 5144, Washington, DC 20202-5144.

I applaud you for your diligence in repaying these Parent PLUS Loans. I have a feeling that by the time you finish you’re going to have the equivalent of an advanced degree in all things having to do with federal loans and college debt!

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