Reps. Susan Davis and Scott Peters Bill to Help Borrowers Pay Down Student Loans Faster
Being able to pay extra on a student loan can provide a sense of satisfaction that a financial burden is shrinking faster than usual. That’s until you learn that the extra money has been applied to future payments and interest, rather than the principal. Congresswoman Susan Davis and Congressman Scott Peters introduced legislation today that would require extra payments on student loans apply toward the principal of the loan first.
“Many people just assume that if they pay a little extra on a student loan, the surplus goes toward paying down the principal amount,” said Davis, a senior member of the House Committee on Education and the Workforce. “It can be discouraging to know that wasn’t the case. This bill is about giving people more options on how they want their money applied to a student loan. Default payments need to be altered to the benefit of the borrower, who should get ahead when they pay ahead.”
“We need to be making it easier and more affordable for qualified students to get a high-quality education, not just students of financial means,” said Peters. “As student loan debt exceeds credit card and auto loan debt, it only becomes more important to find creative ways to help students and families pay off their loans. When students are able to use money to pay off more of their loans earlier they should be rewarded for that effort.”
According to the Consumer Financial Protection Bureau, one of the chief complaints made by borrowers is that their student loan payments are processed against their intent. Instead of applying prepayments towards the loan principal, as the borrower likely expects, loan-servicers will often credit the balance towards future monthly payments.
The Student Loan Fair Prepayment Act would ensure that extra payments are applied first to the principal of the highest interest-rate loan, unless the borrower requests otherwise. This technical change would save borrowers a significant amount and help them pay off their loans more quickly.
When President Obama announced his Student Aid Bill of Rights in March it included language from the bill. Enactment would codify this provision into law, giving students a better opportunity to seek personal solvency after college.
The Student Loan Fair Prepayment Act has been endorsed by Young Invincibles.