Earlier in the year, the government released an online portal where student loan debtors could relay feedback on student loan servicer’s employed by the government. This effort was made in order to improve the overall student loan servicing system which was renowned for discontinuity, inconsistency, and faultiness. Long story short, this customer feedback alerted the Consumer Financial Protection Bureau (CFPB) of a loan servicing tactic that every debtor needs to look out for: the practice of redisclosure. There is both good news and bad news to keep in mind.
How Redisclosure Affects Borrowers
Redisclosure is a legal action commonly undertaken by loan servicing companies, and it takes a little bit of explaining. First off, a loan disclosure statement defines repayment terms, monthly payments, interest rates, and more. When a loan is redisclosed, the terms and conditions on a loan are essentially rewritten, so the original loan agreement is overwritten.
An example of loan redisclosure illustrates its effects perfectly. Let’s say a student loan borrower has a minimum monthly payment of $500 due on a loan of $10,000. The borrower decides to pay $1,000 instead of the minimum. Normally, this would help the borrower save on interest over the life of a loan while getting closer to a loan balance of $0. Loan redisclosure opposes this directly.
After borrowers would overpay on a minimum payment, loan servicers would redisclose the loan by lowering the next minimum payment and extending the repayment period. If the borrower contributes less next month, then they are actually extending the life of their loan and are going to spend more on interest.
While specific statistics are not available on redisclosure, it is a good bet to say that millions of student loan borrowers were affected by the practice. It is clear that this practice extends the life of a loan which then increases the amount spent on interest.
While loan redisclosure is technically legal, it is clearly a tactic to extract more money from borrowers. It is believed that this tactic has been practiced for some time since there have been many reports claiming that student loan servicers neglect to inform borrowers of any redisclosure changes.
What’s Being Done About Redisclosure Practices
Despite the concerning reveal of redisclosure practices, this news hints at the success of the customer feedback portal released by the government earlier this year. One of the main purposes of the portal was to help streamline loan performance and increase loan servicer accountability. The attention brought to loan redisclosure is a direct result of this new system.
In short, the government portal is working exactly how it was designed. It is helping the government manage the student loan situation by alerting them to questionable servicing practices. Another beneficial side effect is the heightened awareness on student loan servicer practices. For example, this article is a direct example of this rise in awareness.
At any rate, similar developments may occur in the future. If this is the case, then the general public will be able to learn more about the practices of student loan servicers. This can only help borrowers understand their loan terms and conditions, and it will help them eliminate their loan balance.
Author: Jeff Gitlen
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