Forgetting to pay a bill, especially your student loans, can be scary. Automating your payments is an easy way to help you keep track of your student loans and never miss a payment. However, did you know that autopay can also save you money?
In this post, we’ll dive into what autopay is, the potential savings you can earn, and if automating your student loan payments is right for you.
What is Autopay?
Autopay is a convenient way to never miss a payment. On a monthly basis, autopay automatically withdraws money from the bank account your lender has on file.
Different lenders have different terms for autopay, such as auto debt, automatic debit payments, or direct debit.
There are three main ways to make automatic payments:
- Standard Autopay by the Lender: Through this method, you simply give your bank account details to your loan servicer. From there, you authorize them to withdraw your payment every month.
- Online Bill Pay: When using online bill pay, you enter your lender as a recipient. Then, you can select an amount that will be automatically paid to the lender each month. This method is typically offered by banks to customers who log into their accounts online or through a mobile app.
- Credit Card Bill Pay: If your servicer accepts credit card payments, you will be required to make automatic monthly withdrawals. It is similar to online bill pay, but with a credit card.
Autopay can help you reduce the worry of whether or not you made a payment on time, no matter the method of making the payment.
How Much of a Discount Does Autopay Get Me?
The autopay discount varies by lender. Most lenders offer a 0.25% reduction in your student loan’s interest rate if you enroll in autopay for your monthly payments. 0.25% might not seem like a lot, but, depending on the repayment terms, it could save you quite a bit.
How Much Will an Autopay Discount Save Me?
Knowing how much the 0.25% interest rate discount will save you is important before deciding to enroll in autopay. Let’s dive into an example.
Let’s say we have a $30,000 student loan with an initial interest rate of 5% under a 10-year repayment term. Without the 0.25% autopay discount toward your interest rate, you would be paying $38,184 over the life of your loan. However, with the 0.25% autopay discount, you would be paying $37,745, saving you $439 throughout your entire repayment term.
What if we double the student loan amount to $60,000 with an initial interest rate of 5% under a 20-year repayment term? Without the 0.25% autopay discount, you would be paying $95,034 over the life of your loan. However, with the autopay discount, you would be paying $93,056, saving you $1,978 in the same time frame.
While the amount might seem small, it’s a decent chunk of money that you could use for some really cool things. $1,978 could be used to pay rent or to go on vacation, but even $439 could be used to go on a nice shopping spree, make a car payment, or invest it into the stock market.
How to Decide if Automatic Student Loan Payments are Right for You
Overall, your student loan principal and repayment terms determine the savings you can have from an autopay discount. While saving money on your student loans is appealing, it’s important to determine if opting in to autopay is a good idea for you.
Pros and Cons of Student Loan Autopay
Aside from saving you 0.25% on your interest rate, let’s look at some other pros and cons of student loan autopay.
Pros of Student Loan Autopay
- You won’t miss your payments: You won’t end up in delinquency or default if you set up autopay since the payments will be made for you automatically.
- Some lenders allow you to make greater-than-minimum payments: If you are in a financial situation that allows you to pay more than the monthly minimum, opting into greater-than-minimum autopay payments could allow you to pay off your loans faster.
Cons of Student Loan Autopay
- Overdraft fees: You have to make sure that you have enough money in your bank account to cover the automatic payments. If you don’t, you’d have to worry about a late payment as well as an overdraft or insufficient funds fee. Make sure you are confident you won’t run into any issues with over-drafting before opting into autopay.
- It’s hard to cancel: If you are having a hard time keeping up with the automatic payments, it might be difficult to cancel. Most times, you’ll have to contact your lender and do so in writing so they can stop. Not to mention that you will have to cancel well before your next repayment period if you want your automatic payments to stop sooner than later.
If you believe that it will be difficult to keep up with autopay on time, allowing your lender to make automatic payments toward your student loans might not be the best option for you.
How to Set Up Student Loan Autopay
Before you set up autopay, you’ll have to know who your loan servicer is. A loan servicer is the company that manages the loan for your lender. To find your student loan servicer, you can log in to your student loan portal to determine this information.
If you are unable to find the information that way, you can contact the lender directly to ask for the information. This will help you determine what your servicer offers when it comes to autopay discounts as well as the terms and conditions of automatic payments.
From here, make sure that you can afford to enroll in autopay. Go over your finances to make sure that you can budget enough money in your account in time for each autopay period. Some servicers allow you to choose your own repayment date, meaning that you could even set up autopay close to when your payday is, making it easier for you to know how much money you have after making a student loan payment.
Finally, enroll! As said earlier, many student loan servicers provide user-friendly online student loan portals with features that will allow you to enroll in autopay yourself. If your servicer doesn’t, you can call them so that they can set it up for you. Regardless, you will need to have your bank account information handy, such as your account number, your bank’s routing number, or your credit card if your servicer allows you to make credit card payments.
Final Thoughts
Determining whether or not to set up autopay is up to you. Everybody’s financial situation is different, and every servicer is different as well. Regardless, you can expect substantial savings on your student loans if you decide to enroll in autopay. You can use the savings to pay your student loans sooner, put it into a savings account, or even use it to invest into a company.
If you’re looking for a private lender with an autopay discount, Sparrow can help you find the best option for you. Sparrow makes it easy to find rates ideal for you and also makes it easier to configure an automatic payment schedule for each loan, saving you time (and as you now know, money!).