Automatic payments can be an effective tool for managing your finances and ensuring you don’t miss a debt payment. The strategy can be especially helpful in keeping your student loan repayment on track.
According to the Federal Reserve Bank of New York, 11.5% of student loans are delinquent by 90 days or more, or are in default. Late or missed student loan payments can have serious consequences, ranging from late fees to damaged credit or even wage garnishment.
Here’s how you can use automatic student loan payments to help pay down your debt faster.
What are automatic student loan payments?
If you’re trying to pay off your student loans, enrolling in automatic payments can be a smart approach to relieving this debt. With autopay, your payments will be automatically sent by your bank to your lender, instead of you sending them manually each month.
There are three main ways of automating payments. Each method has potential benefits and drawbacks, which are listed below. Make sure you consider all the details before deciding on an autopay 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 automatic student loan payments with this method, you ensure your payments are always on time and that you’ll never miss one. What’s more, lenders may offer a discount on your student loan interest rate for setting up automatic payments. The most common rate reduction offered by federal student loan servicers — and many private lenders — is 0.25% on your interest rate. With a lower interest rate, you’ll accrue and pay less interest over time, which will save you money.
There are a few downsides to this method, however. Since you aren’t controlling the payments, you have less flexibility and control over them. Plus, once you’ve signed up for automatic payments, it can be a hassle to stop them. If you decide to end them, it could take about a month for this change to take 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 the monthly 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 auto-debit from a bank account through online bill pay.
Banks typically offer this feature to customers who log into their accounts online or through a mobile app. You can enter your lender as a payee and set up an amount to be automatically paid to the lender each month.
The benefit of auto-debit 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 can update or change your payment settings at any time. You also can set up alerts to get a text or email from the bank reminding you when your student loan payment is due.
A potential downside is that these types of payments might take a little longer to process. Under this method, your bank typically prints an authorized check and sends it to your payee by mail, which could get delayed. To avoid late payments, set your online bill payment to be made a few days before your loan’s due date.
Online bill pay can be the right choice if you’re more comfortable in controlling your payments. It’s also the easiest method to use if you want to pay more than just the minimum amount on your student loans each month and pay down your debt faster.
3. Credit card bill pay
Many federal student loan servicers don’t directly accept payments via credit card, but it may be possible to find private lenders or loan refinance servicers that do.
If your student loan servicer does accept credit card payments, it likely will require automatic monthly withdrawals from the card. You can also check whether your credit card issuer offers an online bill pay feature, if you prefer that method.
There are some potential benefits to making student loan payments with a credit card. For instance, if you pay with a rewards card, you might earn points or miles on your student loan payments.
This method can also provide a little more flexibility for repayment of the credit card debt. Since the payment is made against your credit limit, it won’t come due for another payment cycle. It could give you some wiggle room during a month when other expenses come up.
However, there are some major downsides to paying with a credit card. Credit card companies charge a processing fee to payees, which is why many lenders don’t accept this type of payment. If these fees are transferred to you, they could offset any rewards you’re earning with your credit card.
Credit card debt comes with a high interest rate. 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 automatic student loan payments because you can’t afford them, it can quickly turn a bad debt situation into something much worse.
Even if your student loan issuer doesn’t accept payment via credit card, you might be able to get a card with a 0% introductory APR and transfer the loan balance to it. But that rate would be available only for a limited time, after which the interest rate could be much higher than that on your student loan.
Should I use autopay for my student loans?
Overall, setting up automatic student loan 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 autopay method carefully and take the time to understand how they could affect your loans before signing up for one.
On a final note, even if you opt against autopay, it can also be wise to divide your monthly payment in two. Making payments every two weeks will equate to 26 payments per year — or 13 full payments — which is one payment more than you’d make on the standard 12-payment cycle. This way, your budget won’t feel strained, but you’ll be able to pay your debt down even faster.
Laura Woods contributed to this report.