Student Loan Payment Optimization Act

To amend the Higher Education Act of 1965 and the Truth in Lending Act to clarify the application of prepayment and underpayment amounts on student loans, and for other purposes. 1. Short title This Act may be cited as the Student Loan Payment Optimization Act 2. Application of prepayment and underpayment amounts for FFEL and Direct Loans (a) In General Section 455(d) of the Higher Education Act of 1965 ( 20 U.S.C. 1087e(d) (6) Application of prepayment and underpayment amounts (A) Prepayment amounts Notwithstanding any other provision of this subsection or any other provision of law, with respect to loans made to an eligible borrower under this part or part B which are held by the same holder and which have different applicable rates of interest, the holder of such loans shall apply the borrower’s prepayment amount (within the meaning of section 682.209(b) of title 34, Code of Federal Regulations, or a successor regulation) for one or more of such loans— (i) first toward any outstanding balance of fees, including collection costs and authorized late charges, due on such loans; and (ii) then, except as otherwise requested by the borrower in writing, toward the outstanding balance of principal due on the loan with the highest applicable rate of interest among such loans. (B) Underpayment amounts Notwithstanding any other provision of this subsection or any other provision of law, with respect to loans made to an eligible borrower under this part or part B which are held by the same holder and which have different applicable rates of interest, the holder of such loans shall apply any payment made by the borrower which is less than the amount due at the time of the payment for one or more of such loans— (i) first toward any outstanding balance of fees, including collection costs and authorized late charges, due on such loans; and (ii) then, except as otherwise requested by the borrower in writing, toward the balance of the loan with the smallest balance of principal and interest among such loans. (C) Special rule for borrowers under income-based repayment plan In the case of a loan for which the borrower has elected to participate in an income-based repayment plan under section 493C, subparagraphs (A) and (B) shall not apply unless there is no interest due on the loan. . (b) Requirements for Contracts With Servicers of Loans Section 456(a)(2) of such Act ( 20 U.S.C. 1087f(a)(2) , including the requirements with respect to the application of prepayment and underpayment amounts under section 455(d)(6). 3. Application of prepayment and underpayment amounts for Perkins Loans (a) In General Section 464(c)(1)(C) of the Higher Education Act of 1965 ( 20 U.S.C. 1087dd(c)(1)(C) (1) by striking and (2) by adding at the end the following: (iii) shall provide that the institution shall, in the case of a borrower who provides the institution with a prepayment amount (within the meaning of section 682.209(b) of title 34, Code of Federal Regulations, or a successor regulation) for one or more of the loans held by the institution, apply such prepayment amount— (I) first toward any outstanding balance of fees, including collection costs and authorized late charges, due on such loans; and (II) then, except as otherwise requested by the borrower in writing, toward the outstanding balance of principal due on the loan with the highest applicable rate of interest among such loans; and (iv) shall provide that the institution shall apply any payment made by the borrower which is less than the amount due for a repayment period for one or more of the loans held by the institution— (I) first toward any outstanding balance of fees, including collection costs and authorized late charges, due on such loans; and (II) then, except as otherwise requested by the borrower in writing, toward the balance of the loan with the smallest balance of principal and interest among such loans; . (b) Agreements With Institutions Section 463(a) of such Act ( 20 U.S.C. 1087cc(a) (1) by striking and (2) by redesignating paragraph (9) as paragraph (10); and (3) by inserting after paragraph (8) the following new paragraph: (9) provide assurances that the institution will meet the requirements with respect to the application of prepayment and underpayment amounts under section 464(c)(1)(C); and . 4. Application of prepayment and underpayment amounts for private education loans Section 128(e) of the Truth in Lending Act ( 15 U.S.C. 1638(e) (12) Application of prepayment and underpayment amounts (A) Prepayment amounts Notwithstanding any other provision of law, with respect to a borrower with one or more private education loans which are held by the same holder and which have different applicable rates of interest, the holder of such loans shall apply the borrower’s prepayment amount (within the meaning of section 682.209(b) of title 34, Code of Federal Regulations, or a successor regulation) for one or more of such loans— (i) first toward any outstanding balance of fees, including collection costs and authorized late charges, due on any private education loan held by such holder; and (ii) then, except as otherwise requested by the borrower in writing, toward the outstanding balance of principal due on the loan with the highest applicable rate of interest among such loans. (B) Underpayment amounts Notwithstanding any other provision of law, with respect to a borrower with one or more private education loans which are held by the same holder and which have different applicable rates of interest, the holder of such loans shall apply any payment made by the borrower which is less than the amount due at the time of the payment for one or more of such loans— (i) first toward any outstanding balance of fees, including collection costs and authorized late charges, due on any private education loans held by such holder; and (ii) then, except as otherwise requested by the borrower in writing, toward the balance of the loan with the smallest balance of principal and interest among such loans. .

Summary: Student Loan Payment Optimization Act This bill amends title IV (Student Assistance) of the Higher Education Act of 1965 and the Truth in Lending Act to establish rules that lenders must follow regarding the overpayment and underpayment of student loan payments for borrowers with one or more loans that are grouped together. These rules are applicable to the Federal Family Education Loan and the William D. Ford Federal Direct Loan programs, except for income-based repayment plans, and federal Perkins Loans. The bill requires lenders to apply payments that are more than the monthly payment amount towards any outstanding fees owed and then towards the principal due on the loan that bears the highest interest rate. In addition, lenders must apply payments that are less than the monthly payment amount towards any outstanding fees owed and then towards the loan with the smallest balance of principal and interest combined unless the borrower requests otherwise.