The take on student-loan payments

THERE'S BEEN a lot of talk lately about debt.

Most of it has been about the federal-debt burden. I want to shift the discussion to individuals, particularly those with private student loans. The student-loan ombudsman for the Consumer Financial Protection Bureau has just released a report analyzing complaints the watchdog agency has received from private student-loan borrowers.

Not surprisingly, the chief gripe concerned payment issues. But it's not what you might think. Many borrowers said they encountered problems trying to pay off their debt early.

We know that student-loan debt has been rising at a troubling pace. Outstanding education debt hit the $1 trillion mark in 2011. By last May, it was approaching $1.2 trillion, making student loans the second-largest form of consumer debt after home mortgages, says Rohit Chopra, the ombudsman.

In looking closer at the outstanding student loans, the CFPB estimates that 7 million student-loan borrowers are in default on federal and private student loans. It's important to know the difference - federal student loans have many benefits including fixed interest rates and a number of repayment options including income-based repayment plans. Private student loans typically have higher and variable interest rates and don't have as many repayment options.

Many student-loan borrowers can't refinance their student loans or have limited options. So to reduce their borrowing costs, they make extra payments. However, many said that when they tried to make extra payments on the private loans, their payments weren't processed the way they wanted.

"Many consumers face stumbling blocks, snags, and surprises when it comes to payment processing practices," Chopra wrote in his second report specifically addressing private student loans.

Some borrowers say they have trouble verifying if payments are appropriately applied. Others noted that after submitting additional payments, the money was earmarked for future amounts due. Or they complain that extra payments intended to reduce their principal were instead applied for outstanding fees and interest.

Paying more than is required is often complicated, because borrowers have three or four loans bundled into a single account. The CFPB analyzed more than 3,000 complaints submitted from October of last year through the end of September. Chopra cautioned that the complaints are not based on a representative sample and may not reflect widespread problems. Nonetheless, the borrowers' experiences highlight problems similar to what we saw in the mortgage industry.

Other complaints included problems with getting accurate payoff information from loan servicers. Some consumers said they received conflicting payoff amounts from different customer-service representatives, the report noted. Others reported obtaining a payoff balance, submitting the payment amount and assuming their debt was paid in full, only to find out that their payoff balance was incorrect and their account remained open.

Rather than just issue a report listing the various complaints, the CFPB also issued an advisory that included a sample letter borrowers can send to their servicer, the company that processes your loans, which may also be the lender.

In the letter, you need to clearly state that you are sending more money than is required and then tell the servicer how the payment is to be allocated.

If you have several loans with the same loan servicer and you don't provide instructions, your servicer will generally decide how to allocate your payments. The result might not be in your best financial interest.

The sample letter notes that borrowers can ask that any money over the minimum amount due be applied to the loan that is accruing the highest interest rate. If you have multiple loans with the same interest rate, tell the loan servicer to apply the additional amount to the loan with the lowest outstanding principal balance.

If any additional amount above the minimum amount due ends up paying off an individual loan, then you can direct the lender to apply any remaining part of the payment to the loan with the next-highest interest rate.

The good thing is that borrowers have an advocate. The legislation that created the Consumer Financial Protection Bureau also established an ombudsman for student loans. To submit a complaint, go to consumerfinance.gov/complaint. For additional questions about repaying student loans, the agency has a tool, "Repay Student Debt," which lists several options for both private and federal loans. The URL for the sample letter is consumerfinance.gov/blog/category/student-loans.

Even if you've had problems paying more on your private loans than required, keep pressing. Keep complaining. It's worth it in the end.