Automatic payment can be an effective tool for managing your finances and ensuring you don’t miss a payment.
But is can be especially helpful for keeping your student loan repayment on track.
Nearly two in five (or 37 percent) of borrowers with student loans had a late payment in the past year, according to a report from FINRA Investor Education Foundation.
And late or missed student loan payments can have pretty serious consequences. These can range from late fees to damaged credit or even wage garnishment.
What are automatic student loan payments?
If you’re looking into automating student loan payments, you should know there’s more than one way to do it.
The three main ways of using automating payments are:
- Monthly withdrawals by your loan servicer
- Sending funds through your bank’s online bill pay tool
- Paying student loans with a credit card
Each automatic payment method has its potential benefits and drawbacks which are listed below. Make sure you consider all of them before deciding on an option that’s the best fit for you.
1. Automatic withdrawals by the lender
With this method of automatic payments, you give the details of your bank account to your loan servicer. By doing so, you authorize the lender to withdraw your student loan payment from your account each month.
By setting up payments with this method, you ensure your payments are always on time and you’ll never miss one.
What’s more, lenders often grant a discount on your student loan interest rate for setting up automatic payments. With a lower interest rate, you’ll accrue and pay less interest, plus save money. Talk about a win-win.
There are a few downsides to this method, however. Since you aren’t controlling the payments, you have less flexibility and control over them.
And once you’ve signed up for automatic payments, it can be a bit of a hassle to stop them. If you decide to end them, expect it to take about a month for this change to go into effect in your lender’s payment system.
If you’re interested in saving on interest and can keep your bank account well-funded to cover payments, enrolling in automatic student loan payments could be the best way to go.
2. Online bill pay from your bank
Another common method of paying student loans is setting up automatic payments from a bank account through online bill pay.
Banks typically offer this feature to customers who log in to their accounts online or through a mobile app. From there, you can enter your lender as a payee and set up a monthly, automatic payment to the lender.
The benefit to this method is that it gives you more control over your money. You won’t have to give the lender access to your bank account and you’ll have the ability to update or change your payment settings at any time.
Additionally, you could set-up alerts to get a text or email reminding you when your student loan payment is due, according to Money Girl Laura Adams.
A potential downside is that these types of payments might take a little longer to process. Usually, your bank will print an authorized check and send it to your payee by mail. To avoid late payments, set your online bill payment a few days before your lender’s due date.
Online bill pay can be the right choice for you if you’re more comfortable staying in control of your payments. It’s also the easiest method to use if you want to pay more than your minimum amount on your student loans each month.
3. Credit card bill pay
While most federal student loan servicers don’t accept payments via credit card, some private lenders or refinance servicers do.
If your student loan servicer does accept credit card payments, these will likely be set up through automatic withdrawals. You can also check if your credit card issuer offers a bill pay feature if you prefer that method.
There are some potential benefits to paying student loans with a credit card. For instance, if you pay with a rewards card, you might earn points or miles for your student loan payments.
It can also provide a little more flexibility for repayment. Since the payment is made against your line of credit, it won’t come due for another payment cycle. This could give you some wiggle room if you have a month where other expenses come up.
There are some major downsides to paying with a credit card, however. Credit card companies charge a processing fee to payees, which is why many lenders won’t accept this type of payment. These fees often offset any rewards you’re earning with your credit card in the first place.
Credit cards are also high-interest debt. So if you fail to pay the balance off in full each month, you’ll get hit with a big interest charge.
And if you’re using credit cards to cover student loan payments because you can’t afford them, it can quickly turn a bad debt situation much, much worse.
Should I use auto-pay for my student loans?
Overall, setting up automatic payments can help you keep up with payments and free up some mental energy for other financial tasks.
But the method you choose can either help or hurt your student loan repayment goals. Be sure to consider each auto-pay method and take the time to understand how they could affect your loans before signing up for one.
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