Should I auto-pay my student loans?
Almost all student loan servicers provide an option of auto-pay student loans. Learn more about auto-pay, its advantages and disadvantages
Updated by Chinmoy Dutta on 18th March 2020
Setting up automatic monthly debit for student loans is usually a relatively simple process with most of the lenders and student loan servicers. Many of the loan servicers offer a reduced interest rate as an incentive for auto-debit. It is often confusing for borrowers as to whether or not they should provide their loan servicers with the authority to auto-pay student loans.
Well, actually, in most cases automatic payments can be a great idea. But one should keep in mind that these payments need to be a part of a broader loan repayment strategy. If borrowers use a “set and forget” approach, they might face trouble later. The automatic payments have certain risks to them. Those who understand the loopholes of automatic payment can avoid the dangers, save money and pay off student loans easily.
Table of Contents:
- What is the biggest benefit of auto-pay?
- Can lenders be trusted with automatic payments?
- A hidden danger of lazy repayments
- Watch for loan servicer mischiefs
- Opinion on auto-pay
What is the biggest benefit of autopay?
Most student loan servicers offer a 0.25% reduction in interest rates to the borrowers selecting autopay as their option. However small this interest rate might seem, when applied to a large sum of the amount borrowed, a significant amount of money can be saved. For example, a borrower with a $100,000 amount of student loans can save $250 per year.
It is important to understand that providing the checking loan information to student loan servicers might have some serious outcomes. The student loan servicers website might get hacked. Your account might get overdrawn if the servicer makes an error in a payment.
Can lenders be trusted with automatic payment?
There are several perils that come with providing direct access to your hard-earned money. However, luckily for us, we can relieve those risks by using some of the protections as mentioned below.
The ways by which borrower can prevent risks:
Setting up a checking account for auto-payments: Borrowers can set up a checking account to set up automatic payments with different servicers. Using a single account for all kinds of automatic payments will help in streamlined supervision of all your auto-payments
Do not connect your checking account with your savings account: Checking accounts have overdraft protection. To overcome a shortage, banks can pull the money from your savings account to make up for the shortage. Ask your bank, to not do this with your auto-pay checking account. If the accounts are connected, your student loan servicer has access to your savings
Avoid putting too much money into your auto-pay account: A computer or a human error can cause larger withdrawal to be made and getting this error corrected and the money back into your bank can take time.
These steps, if followed, can protect the borrower from student loan servicer related errors.
A hidden danger of LAZY REPAYMENT
Student loan repayment is one of the important phases of student loans. It is absolutely necessary for student loan borrowers to understand how student loan repayment works and what plans are available for them. The worst way to pay off a student loan would be by making minimum payments. It is because minimum payments extend the time taken to pay off a student loan, thereby increasing the spending on the interest. People who make a minimum payment every month and with a “set it and forget it” attitude are ideal customers for student loan lenders. It is so because these types of customers provide the lenders with maximum profit in minimum effort.
If you have more than one student loan, you can always go for the consolidation of your student loans. If you do not want to go for consolidation, then put all the loans in minimum repayment and attack a single loan with extra payments
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Watch for loan servicer mischiefs
For many student loan servicers, it was seen that enrollment into auto-pay was very simple and easy. However, many loan servicers make it unnecessarily complicated and charge late fees from their customers. Some lenders take 20 days while some take full two billing cycles. This delay in the system confuses most borrowers and they don’t know whether they have to make their next payment manually or when is the auto-debit starting?
Also, borrowers are hereby forewarned not to auto-debit on the last day of the billing cycle because there might be a bank server issue. This might lead to the processing of late fees from the borrower. Hence it is advised to give yourself a few days to address any issues that might arise.
Should you opt for auto-pay or not?
Auto-pay might be suitable for some of the borrowers whereas for some it might not be exactly beneficial. Those who think they might benefit by setting up auto-pay and forget about them completely, it is better if they stick with manual payments. Because of the dangers related to auto-pay as discussed above, the ‘apply and forget’ policy might become hazardous for student loan borrowers.
If you follow the protection methods discussed above, you should be able to use auto-pay safely and to your benefit as well.