October 28, 2013 by Latasha Myers
As college tuition and fees continue to rise, more students are finding that they have to turn to private loans - which are usually tagged with higher interest rates and less consumer protections than federal loans - in order to finance their degree. As of July 2012, about 850,000 private loans were in default.
This new report from the Consumer Financial Protection Bureau (CFPB), summarizes roughly 3,800 complaints on private student loans received from October 1st, 2012 to September 30th, 2013. The most common complaints reported by students were having difficulties making advanced payments on their loans
Private student loans now total $165 billion even with federal grants and loans that are available to help students finance college. Studies have shown that less student loan debt frees up a graduates’ ability to purchase a home, pay lower mortgages, and invest in critical savings plans (such as for retirement), making it essential for borrowers to be able to pay down the principal on their loans in advance if they wish to do so.
However, according to the report, some borrowers have been barred from making payments higher than the minimum payment due. Student borrowers reported to the CFPB that when they tried to make advanced payments on their loans, they were propelled into a “paid ahead" or "advanced payment" category. Taking away a borrower’s ability to pay ahead means that interest rates will continue build up on any unpaid amount, forcing the student to pay back larger debts for a longer period of time.
Columnist Ann Carrns offered this guidance in The New York Times to borrowers who want to pay ahead. Carrns advises that borrowers should:
"send written instructions to your servicer; otherwise, the servicer may choose how to allocate the extra money. The bureau created a sample instruction letter, directing the servicer to apply extra payments to the loan with the highest interest rate first, which is generally the best option for most borrowers."
Although not a representative sample of all student loan borrowers, the CFPB report offers vital insight on the real concerns of private student borrowers. While collecting these data on student borrowers is a step in the right direction, issues with student loans are only a part of the problem. The high worth of a college degree is undeniable, but that does not mean that a college degree has to be coupled with high debt. We are thrilled that the federal government offers a platform where students can voice their complaints, but ensuring that a quality college education stays affordable and accessible for all Americans needs to be a number one priority.