Student Loan Payment Optimization Act

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Student Loan Payment Optimization 
Act''.

SEC. 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)) is amended by adding at the end the following new 
paragraph:
            ``(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)) is amended by striking 
the period at the end of the first sentence and inserting the 
following: ``, including the requirements with respect to the 
application of prepayment and underpayment amounts under section 
455(d)(6).''.

SEC. 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)) is amended--
            (1) by striking ``and'' at the end of clause (i); 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)) is amended--
            (1) by striking ``and'' at the end of paragraph (8);
            (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''.

SEC. 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)) is 
amended by adding at the end the following:
            ``(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.