Why Student Loan Providers Are Charging Us More Than They Should
And What You Need To Know To Avoid It
Disclaimer: the content in this article is only based on my experience with refinancing my student loan. It is not intended to be a generalization across all loan providers.
Refinancing student debt to a lower interest rate is often accompanied by feelings of joy and renewed hope. I remember feeling that way when I refinanced my loans in 2017. But two years after refinancing with a private loan provider, I finally understand exactly why I was scheduled to pay $641 more in interest despite making every payment on time and in full. It took me at least 10 hours of phone calls and substantial research to get a clear answer. In 2019 I refinanced my loans with a different provider and was determined to proactively leverage my newfound knowledge to avoid additional interest. Unfortunately, the experience was still cumbersome and required significant persistence when speaking with customer service personnel.
My experiences confirmed that other student loan borrowers face the same issue when refinancing, and lenders withhold material information which can generate millions of dollars of additional income from interest charges. Therefore, I want to drive change by sharing my eye-opening knowledge with fellow borrowers and lawmakers.
Takeaways from this article will include:
1. Confirmation that it’s very difficult to get clear answers from a loan provider’s customer service representatives, either because they are untrained or oversimplify answers (to the point that they are inaccurate)
2. Understanding why some borrowers who have refinanced are paying more interest than they should due to withheld information
3. If you have refinanced already, understand how to calculate how much you may be overpaying
4. If you plan on refinancing, understand how to avoid overpaying
5. The reasons why lawmakers should require that student loan providers improve their transparency measures
1. The impossible task of getting accurate answers
It took me one year to even start to question the numbers. I noticed that my monthly payment was higher than the monthly payment quoted on my Final Loan Disclosure document, but like many student loan borrowers, I assumed that I was just not understanding something.
Who am I to question an established financial institution?! But something still didn’t add up, so in 2018 I put my college Finance degree to use and created a loan scenario analyzer in excel.
It led to more questions since based on my loan balance, interest rate and loan term, my monthly payment should not have changed. As a next step, I called customer service but was met with boilerplate answers like, “the way you calculate the monthly payment is…” or “you need to remember that interest accrues on a daily basis” or “the Final Loan Disclosure document was only an estimate and we cannot know for sure until we receive your loan.” The customer service reps and supervisors sounded so confident that disagreeing with their answers requires even more confidence. But most student loan borrowers don’t have that self-assurance since neither our college degree, nor our day job requires us to understand the intricacies of how loans work.
That’s why many of us just stop asking questions and take the confident rep’s answers at face value.
Fortunately, I’m persistent and enjoy asking questions! More importantly, I knew I was accounting for their boilerplate answers, but the numbers were still not adding up. After at least 10 phone calls over the course of a year, and asking increasingly more detailed questions, I can finally confirm that I was not missing anything!
My loan provider both withheld and misrepresented material information at the start of my loan and customer service representatives provided opaque answers. The only reason I know the truth now is because I persisted!
I want to share this knowledge so fellow borrowers can also gain clarity, future borrowers can avoid the issue, and lawmakers can implement policy that will require student loan providers to improve their transparency.
2. Why we are overpaying in interest
“The Final Loan Disclosure document is only an estimate and we cannot know for sure until we receive your loan.” If you have received this line, it misrepresents the facts.
The actual reason your monthly payment will increase is because there often are more than 30 days between when your new loan provider funds the loan and when your first payment is due. That means interest accrues for those extra days and, when your first month’s payment comes due, more of your payment will have to go towards interest. This leads to a ripple effect because, when less of your first month’s payment goes towards principal than scheduled, then the principal balance will be higher the next month, and ultimately lead you to pay more over time.
The flagrant issue is when borrowers, like me, are neither notified about this excess interest nor given an opportunity to pay it before the loan provider recalculates our payments.
On March 16, 2017, I received an email from the new loan provider that my funds had been disbursed. A year later, when I started asking questions, they informed me that an updated repayment schedule had been mailed to me (not emailed like everything else). Unaware that the letter ever existed, I asked them to send me an electronic copy, which they did. Turns out that letter was dated March 14, 2017 — two days before the email notification that the funds had been disbursed — and included the higher monthly payment, higher total interest and first payment date. After a multitude of phone calls, I finally know that the increase was due to the assumption that I would not pay the extra 10 days of interest. Herein lies the problem.
Not only did they assume I would not pay, they never even gave me the chance to pay since the letter was dated 2 days before the notification that the funds had been disbursed and 12 days before the interest was due to be capitalized.
When I refinanced in 2019, a loan underwriter stated that he believes it is common practice for lenders to make the change without notifying borrowers because “it would add confusion and it’s simpler this way.”
Truth is a defense; “confusion” is not. Especially when withholding information means that borrowers do not know that this is an issue and do not know that they should consider paying more than the minimum. Shouldn’t student loan providers be held to a higher level of information disclosure? Shouldn’t students be given the option to pay the additional interest before it is added to their loan balance and increases total interest charges?
When we consider that 44M students hold federal or private debt and more than 50% of borrowers have more than $40K in loans (which accounts for less than 4% of defaults, meaning they do fulfill their obligations), then we may assume that at least 20M borrowers will seek to refinance to “better” terms at some point in their loan life.
If 20M borrowers pay a few extra dollars of interest every month due to withheld information, then lenders are poised to capture tens of millions of dollars of additional interest income per month. This can then be turned into brand new loans, and thus repeat the cycle which fuels the beast.
Here are a few more red flag takeaways:
1. The Final Loan Disclosure document that you sign to enter into a contractual agreement with your student loan provider often understates a borrower’s actual monthly payment and does not have an accurate first payment date.
2. When borrowers call customer service to ask why their monthly payment is higher than the monthly payment quoted on the Final Loan Disclosure document, many are told, “because the Final Loan Disclosure document is only an estimate.” That answer is oversimplified to the point that it misrepresents material information.
3. The customer service supervisors I spoke with referenced a law that restricts how early the first payment can be scheduled, and confirmed that all of their borrowers’ first payment date will be scheduled between 30–60 days after loan funds are disbursed. This further communicates that all borrowers will have excess interest that capitalizes, and my situation is not an isolated event. Despite the recurring nature of this issue, the Repayment Schedule Update document I received failed to communicate the true reason why a borrower’s interest payable has increased. Instead, the document quotes generic reasons as you can see in the image below.
4. Some loan providers (like the loan provider that I refinanced with in 2019) will not even send an updated Repayment Schedule which will therefore make it even more difficult for borrowers to be aware of the changes to interest schedules.
3. If you have already refinanced, calculate how much interest you could be overpaying
To make it easier for fellow borrowers to understand their situation, I have created a GoogleSheet. It will ask you to answer seven questions, and will then be able to calculate how much extra interest you should have been given an opportunity to pay. It will also calculate how much more interest loan providers will be earning off of your loan because they did not notify you of the option to pay the extra interest.
Even if the amount does not seem high on an individual basis, consider how significant it is at the loan provider level.
This GoogleSheet will ask you to answer:
- What was the loan amount that you refinanced?
- What month and day was your loan disbursed?
- What month and day was your first payment?
- What is your interest rate?
- Are you enrolled in autopay?
- What is your loan term?
- Confirm your minimum monthly payment
When I finally got to the bottom of the issue, and discovered that I was scheduled to pay $641 more interest to my loan provider over the life of my loan solely because I did not pay $378 of extra interest along with my first payment, I started asking different questions.
Was there any disclosure issued to let me know that I should consider paying the extra interest?
Is this common occurrence represented anywhere in the lender’s documents?
Do they believe most student loan borrowers are aware of this common behavior?
The answer to all of my questions was No.
The question that I did not get a clear answer to was:
Can you expect a borrower, who is not aware of this common behavior, to know that they should pay off the extra interest rather than follow the lender’s repayment schedule?
4. If you have not refinanced, steps to avoid overpaying
On the same day that you sign the Final Loan Disclosure document, which enters you into the contractual agreement with your new loan provider, call customer service and communicate that you want to pay any excess interest that will accrue between the date your loan is disbursed and the date your first payment is due. Excess interest will accrue when there are more than 30 days between the date your loan is disbursed and the day your first payment is due.
The loan provider will probably ask you to call back after they pay off your prior loan provider, but at least they will have a note about your request. Call back within five days to find out if they have identified when your first payment is due.
If your loan was disbursed on June 1st and your first payment will not be due until July 14th, then you will want to pay the interest that accrued between June 1st and June 14th before June 14th.
This will ensure that interest does not capitalize, and assuming you make all of your minimum payments on time, you will not pay more interest than necessary.
Additionally, you will want to make sure that your new loan provider does not overpay your old loan provider. If they do, you should ask that the old loan provider mail the check (in the amount of overpayment) directly to your new loan provider, and require that the new loan provider calculate your interest payable based on the true loan amount, not the overpaid loan amount.
I recognize that making more phone calls is an onerous task, but until our lawmakers can protect student borrowers and require more transparency, these are the steps we will have to take.
5. A message to lawmakers
Student debt holders are naturally younger and less financially experienced. Many of us sign our first loan document even before we turn 18, and we are entering into debt because our parents either did not have the financial capacity to save for our education or because our parents were not financially savvy.
Therefore, shouldn’t there be a higher standard for information disclosure and mandated transparency for student loans?
Politicians are currently focused on making school tuition free, however millions of student loan borrowers are drowning in debt, and our student loan providers are capitalizing on our lack of financial experience.
Additionally, as I have outlined in the first and second sections of this article, information is being intentionally withheld, answers are purposely ambiguous, and some student loan borrowers are unnecessarily paying hundreds more in interest.
This material piece of information was only made clear to me after numerous phone calls and only because I persisted! Let’s ask our lawmakers to accept the responsibility of protecting younger borrowers and raise the standard for information disclosure.
If you are a student loan borrower and have any questions from this article, please email Andi at firstname.lastname@example.org.
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