Being able to pay extra on a student loan can provide peace of mind 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, reducing your ability to pay down the principal. Congresswoman Susan Davis (D-San Diego) introduced legislation today that would require extra payments on student loans go 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.”
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.
Davis’s bill has been endorsed by Education Trust, Young Invincibles, Center for Responsible Lending and the American Council on Education.