With a further extension of the federal student loan repayment freeze, it can be tempting to simply forget all thoughts about your debt until May 1 approaches.
But those additional three months of disruption in payments could be a critical time to prepare for their return, which President Biden urged borrowers to do when announcing the extension in late December. Because one thing is (almost) certain: student loan repayments will eventually come back. And before that, it might be a good idea to sign up for automatic payment.
Here’s how to tell if it’s a good idea for you.
Pros and Cons of Automatic Payment for Student Loans
After about two years of automatic forbearance, it can be easy to lose the habit of paying off a student loan each month. Direct payment, or direct debit, can be a good option for borrowers who want to “pay it and forget it” with one less bill to think about each month, according to Leslie H. Tayne, financial lawyer and founder of Tayne Law Group. .
“If you haven’t set up automatic payment, you might forget to make a student loan repayment, which could lead to penalties and credit problems,” she says.
Another reason to sign up: you might get a lower interest rate. Most student loan managers offer a 0.25% discount to borrowers who pay their bills automatically. This is the case for federal and private loans. That might not sound like a lot – and it isn’t, really – but the savings can add up over time. This is especially true if you have significant debt.
For example, suppose you owe $ 100,000 with an interest rate of 4% and you have 10 years to pay it off. Your monthly payment would be $ 1,012 and you would pay a total of $ 21,494 in interest over the term of your loan. By lowering the rate to 3.75%, your payments would drop slightly to $ 1,001, but you would save $ 1,421 in total interest. Every gesture helps.
Keep in mind that auto pay can backfire if you’re not careful. Your student loan payment will be withdrawn from your designated bank account whether or not you have sufficient funds there, warns Rebecca Safier, certified student loan advisor and debt expert at Student Loan Hero. So if your balance is low, you could find yourself overdrawn and paying high fees.
“If you’re worried that you won’t have enough money in your bank account each month to cover your living expenses, automatic payment may not be the best choice,” Safier says, adding that if you’re struggling Keeping track of your student loan bill, you might be interested in exploring options to reduce or suspend payments, such as requesting an income-tested refund, forbearance, or deferral.
If you’ve already signed up for automatic payment, but later decide it’s not right for you, be sure to unsubscribe as early as possible and check when you will revert to manual payments. Tayne noted that loan departments often need 5-10 business days to turn off automatic payment.
What if I was signed up for automatic payment before pandemic abstention?
Don’t assume that your student loan payments will resume with automatic payment when the emergency forbearance ends.
Even if you were already configured for automatic payment, if you signed up before March 13, 2020, you will need to log into your server’s website and re-register. Updating your automatic payment preferences shouldn’t change when your payments resume, but it’s always smart to check, says Betsy Mayotte, president and founder of the Institute of Student Loan Advisors (TISLA).
Also, keep in mind that your student loan officer may have changed recently. FedLoan, Navient and Granite State Management & Resources are all leaving the loan management space and moving to new systems. Therefore, if your loans were managed by one of these organizations, you will need to sign up for automatic payment with your new manager.
“In this case, it’s especially important to check your loans and make sure your student loan payments are set up correctly, as the new loan manager might not have your information or payment preferences,” says Safier. You can log into your Federal Student Aid dashboard to find out who your loan manager is.
While you’re at it, check your payment date so you don’t get caught off guard (or underfunded) when your student loan payment is pulled 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 posted to your account until after the break. Mayotte expects this to be the same day of the month as before the COVID-19 waivers, but it’s always a good idea to check. And if you need to change the due date, she notes that in most cases you can do it by calling your repairman.
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