With another extension of the federal student loan payment freeze, it may be tempting to simply throw out any and all thoughts about your debt until May 1.
But these three extra months of default could serve as a critical period to prepare for their comeback, something President Biden urged borrowers to do when announcing the extension at the end of December. Because one thing is (almost) certain: student loan payments will eventually come back. And before they do that, it might be a good idea to sign up for an automatic payment.
Here’s how to tell if it’s a good idea for you.
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Pros and Cons of Auto Pay for Student Loans
After nearly two years of spontaneous patience, it can be easy to break the habit of making student loan payments each month. An automatic payment, or automatic debit payment, can be a good option for borrowers who want to “set it and forget it” with one less bill to think about each month, according to Leslie H. Tyne, a financial attorney and founder of Tayne Law Group.
“If you don’t have the automatic payment setup, you risk forgetting to pay off your student loan, which could lead to penalties and credit strife,” she says.
Another reason to sign up: You can get a lower interest rate. Most student loan providers offer a 0.25% discount to borrowers who pay their bills automatically. This is the case for federal and private loans. It may not seem like much – and it really isn’t – but the savings can increase over time. This is especially true if you have a large amount of debt.
For example, let’s say you owe $100,000 at a 4% interest rate and have 10 years to pay it off. Your monthly payment will be $1,012 and you will pay a total of $21,494 in interest over the term of the loan. By lowering the rate to 3.75%, your payments will drop a bit to $1,001, but you’ll save $1,421 in interest overall. Every part helps.
Keep in mind that automatic payment can backfire if you are not careful. The student loan payment will be withdrawn from your designated bank account, regardless of whether you have enough money there, warns Rebecca Safire, certified student loan counselor and debt expert with Student Loan Hero. So if your balance goes down, you could end up with an overdraft and a hefty fee.
“If you’re concerned that you don’t have enough money in your bank account each month to cover living expenses, an automatic payment might not be the best option,” Safier says, adding that if you’re struggling to keep up with your student loan bill, it may be worth looking into In options to lower or pause payments, such as applying for income-driven reimbursement, forbearance, or deferment.
If you were previously enrolled in automatic payment, but later decided that it is not right for you, be sure to unsubscribe as soon as possible and check when you will return to manual payments. Tayne noted that loan providers often need 5 to 10 business days to stop an automatic payment, so they may try to get payments from the old account if you don’t make the change early enough before the payment date.
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What if I am signed up for automatic payment before the pandemic?
Don’t assume that your student loan payments will resume automatic payments when the emergency forbearance ends.
Even if you’ve been set up for automatic payment before, if you signed up before March 13, 2020, you’ll need to log into the service’s website and re-subscribe. Updating your automatic payment preferences shouldn’t change when you resume your payments, but it’s always smart to check back, says Betsy Mayott, president and founder of the Institute of Student Loan Advisers (TISLA).
Also keep in mind that the student loan service has changed recently. FedLoan, Navient, and Granite State Management & Resources are exiting the loan service space and switching to new systems, so if your loans are serviced by any of these organizations, you’ll need to sign up for an automatic payment with the new service provider.
“In this situation, it’s especially important to check your loans and make sure your student loan payments are set up correctly, as the new loan service may not have your information or payment preferences,” Safier says. You can log on to the Federal Student Aid dashboard to see who is responsible for the loan.
While you’re at it, double-check your payment history so you’re not surprised (or underfunded) when your student loan payment gets withdrawn in May. Mayotte says you should be able to see your due date by logging into your student loan account. Note that this information may not be published to your account until the end of the suspension period approaches. Mayotte expects it will be the same day of the month as it was before the COVID-19 waivers, but it’s always a good idea to check. And if you need to change the due date, then I noticed that in most cases, you can do this by calling the service.
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