If you’re a student, you might be able to take advantage of a little-known student loan hack. By enrolling in auto-debit rate discounts even before graduating, you could get a student loan discount while still in school.
Student loan servicers often offer an interest rate discount (typically 0.25%) as an incentive for borrowers to enroll in automatic payments. The borrower provides their bank account information, and the loan servicer automatically withdraws funds from the account each month to cover the loan payment.
For many with student debt, claiming this interest rebate won’t occur to them until their loan enters repayment, which is typically six months after their graduation date.
Yet with unsubsidized federal student loans, interest starts accruing as soon as funds are paid out, even though repayment could still be years away. If an interest rate discount is applied to the debt before graduation, less interest will be charged on the principal and the borrower will save.
Some student loan servicers allow students to qualify for a rate discount by setting up automatic payments before they graduate. Here’s how to do it.
See if your servicer allows automatic payments before graduation
First, you’ll need to find out if your loan servicer offers this feature to students who are still in school. Student loan servicers’ policies vary, so check with yours to verify its auto-pay discounts.
Many servicers’ websites outline their student loan interest discount for automatic payments. However, you might need to contact the company for full details on how these are earned and applied to student loans while you’re still attending school.
If your loan servicer offers this feature, you can set up automatic payments by providing the servicer with your bank account number and other information. They will verify the information and then apply the student loan discount to your debts.
Servicers offering a student loan discount for automatic payments
Two popular student loan servicers that offer student loan rate discounts with automatic payments include Great Lakes and Sallie Mae.
Borrowers with federal loans serviced by Great Lakes “can set up Auto Pay at any time,” says Brett Lindquist, the loan servicer’s Chief Marketing and Sales Officer. “However, per federal regulations, the 0.25% interest rate reduction won’t apply until you graduate or leave school and your loans enter repayment.”
However, you don’t need to wait to start making payments on your loans. “Paying even a small amount each month can make a big difference,” Lindquist says. “It not only reduces your principal, but it also reduces the amount of interest that accrues on your unsubsidized loans and eventually capitalizes.”
Student debts serviced by Sallie Mae also offer the ability to qualify for a rate discount if the borrower has begun making payments. “Students who have signed up to make monthly payments while in school may enroll in auto debit,” a Sallie Mae spokesperson confirmed via Twitter.
With the combination of early student loan payments and a discounted interest rate, these students will be far ahead of the curve when they graduate.
How an interest discount translates to savings
Getting this student loan discount while you’re still a student can save on interest. But how much difference does 0.25% really make? This example might illustrate what kind of benefits students can expect.
If your student loan service allows you to set up automatic payments in school, even a monthly check of $10 could qualify you for this benefit.
Assuming a student borrows $10,000 a year in unsubsidized federal loans to earn a degree in four years, he would have a principal of $40,000. But with interest figured in, his balance will actually a bit higher at graduation.
For example, 6.25% interest on a $10,000 annual disbursement will accrue $6,653 in interest over four years. If a 0.25% interest rate discount and monthly payments of $10 are made from the beginning, however, the accrued interest drops by more than $300.
This, combined with the $10 monthly contributions, will result in student loans that are over $800 lower upon graduation.
Even if you don’t opt for early repayment, you should still enroll now to ensure you get the full benefit of the interest rate discount after graduation. This example from Great Lakes shows how much it can save you.
With the combined interest savings and one less payment, the interest rate reduction adds up to savings of $584.49.
For current college students, it’s worth their time to check if their loan servicer will grant them an early interest rate discount for making automatic payments while still in school. With a discounted student loan rate, loans will accrue less interest and students will graduate with a lower student loan balance to tackle.
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