When you make more than the minimum monthly payment on your student loans, you may be able to pay them off early and save thousands in interest in the process. But make sure your loan servicer credits you for those student loan “prepayments” against your loan principal.

The Consumer Financial Protection Bureau reports that some loan servicers may thwart that early paydown strategy if they react to the extra payments by extending borrowers’ loan terms or granting them a “payment holiday.”

Borrowers who make payments automatically are advised to tell their servicer exactly what to do with the extra money — to allocate payments to loans with the highest interest rate, for example.

If your monthly payment goes down, that’s a clue that your servicer may have reset your loan repayment schedule — a process known as a “redisclosure” of repayment terms, said Seth Frotman, the CFPB’s student loan ombudsman.

“While lower monthly payments could sound like a good thing, if consumers paid according to the new billing statement amounts sent by their servicers, they would make smaller payments over a longer time — potentially increasing the total cost of their loans by hundreds of dollars,” Frotman said.

One borrower complained that their loan servicer tried to double the length of their repayment repayment term. According to the complaint, the servicer offered no way to increase the payment amount through their website or through their automated phone system.

“I can LOWER my payment through these automated systems, but I cannot restore my original, higher payment amount,” the borrower reported.

Extending your loan repayment term without an interest rate reduction often means that you’ll pay more interest over the life of your loan (see “Why WOULDN’T I want to lower my monthly student loan payments?“).

If you’re able to make more than your minimum monthly payment on your student loans, you may be able to pay them off early. If that’s the case, you may be able to achieve additional savings by refinancing your loans at a lower interest rate.

Borrowers who are comfortable making larger monthly payments can often refinance into a loan with a shorter repayment term. All other things being equal, the shorter the repayment term, the lower the interest rate on your new loan will be.

Borrowers who refinance their student loan debt with lenders on the Credible platform with the goal of reducing their interest rate, loan term and total amount repaid can expect to save nearly $19,000 over the life of their new loan.

Credible is a multi-lender marketplace that allows borrowers to get personalized rates and compare loans from vetted lenders, without affecting their credit scores.


Matt Carter is the editor of Credible News, which provides information that consumers need to make decisions about student loans and personal finance. We welcome comments and tips. Email: mcarter@credible.com