Two days before the presidential inauguration, the Consumer Financial Protection Bureau announced it had filed a lawsuit against student loan servicing giant Navient. The announcement made headlines and caused a lot of concern among student loan borrowers, especially those with loans that Navient services.
The Student Loan Ranger has received quite a few questions from consumers wanting to know how this lawsuit will affect them and, in a few cases, from those so concerned they are considering stopping future payments to Navient.
If you are one of the latter, don’t stop paying. This will only hurt you and your credit.
In light of these concerns, we will review and explain two of the suit's allegations and give borrowers tips on ensuring their loans are being serviced correctly.
Failure to Correctly Apply or Allocate Borrower Payments
CFPB alleges that Navient didn't correctly apply or allocate borrowers' payments to their accounts. This may be true of Navient as with most, if not all, student loan servicers.
In this situation, two aspects are likely at play – consumers misunderstanding how federal regulations define payment application and automation.
Borrowers, especially those working to pay off their loans sooner, need to understand how payment application works when they send in extra funds. Federal regulation requires that all payments be applied first to any outstanding fees, such as late fees, and then to the interest that has accrued to date. Only after these two will the loan servicer apply any remaining funds to the principal.
If a borrower sends in extra money, the regulations also require that the loan holder apply that extra to future payments due unless the borrower explicitly advises the servicer not to. To be clear, the payment is applied to principal and interest the exact same way regardless of whether the due date has been pushed forward.
Regarding automation, most student loan payments are sent to a lockbox – a system through which a bank receives and processes customer payments for a business. Many of these systems are automated, which improves efficiency, but they can hit some speed bumps if customers include special instructions with their payments. These notes may get separated from the payment and overlooked.
Some student loan servicers now include options for extra payment allocation in their online payment protocols, and we suspect more will do so going forward. But to avoid issues when sending excess funds, make sure you include written instructions with your account number and call your servicer to ensure they have correctly applied the funds.
Remember, you cannot allocate the money that goes to principal and interest, but you can adjust which loan the additional funds go to and whether your due date is moved up.
Pushing Struggling Borrowers Toward Forbearance
CFPB also alleges that Navient steered struggling borrowers toward forbearance, which puts borrowers' loans on hold but also capitalizes unpaid interest that accrues during the forbearance period, increasing the balance. Forbearances can be an easy solution for both the borrower and the loan holder – they are simple to explain, apply for and process. But they are rarely the best solution.
Income-driven repayment plans, which can help keep payments affordable and sometimes even subsidize unpaid interest, are a much better, longer-term solution for struggling borrowers. The problem is that these plans can be difficult and time-consuming to explain and apply for, which is why many borrowers end up asking for or loan servicer associates end up offering forbearance first.
While CFPB's allegations regarding forbearance seem to indicate that this issue no longer exists, borrowers can be sure they choose the best option by educating themselves on what’s available and ensuring the loan servicer associate they work with has a full picture of their financial challenges and goals.
Borrowers should also educate themselves about available options before calling their servicer. If offered an option that doesn’t seem to be a good fit, borrowers should ask what else is available.
Regardless of the lawsuit's outcome, the Student Loan Ranger believes these situations are almost always beneficial to consumers because they start the conversation on improving loan payment processes. However, regardless of improvements, consumers are responsible for reading, understanding and complying with all the terms of their student and other consumer loans.