Servicer-Driven Payment Misallocation

Servicer-driven payment misallocation exploits trust, with companies like Mohela and Nelnet routing payments to minimize costs rather than reduce debt. Borrowers on income-driven plans face unnecessary interest accrual when payments are misapplied to low-priority balances—a practice that is 30% slower at reducing principal than correct allocation, based on Consumer Financial Protection Bureau complaints. Unlike Capitalized Interest on Income-Driven Repayment, which compounds debt directly, this practice wastes borrower payments, with servicers diverting $100 monthly on average away from high-interest loans.