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If money is tight, it may be nerve-wracking to allow your student loan payment to be automatically pulled from your bank account each month. But if you can get your budget in shape with enough buffer, enrolling in autopay for student loans can land you an interest rate deduction up to 0.25 percentage points.
What Is the Student Loan Autopay Discount?
Lending money is inherently risky for financial institutions. They may review credit history and charge interest to help protect themselves, but there's always the chance someone will fail to repay their loan.
To incentivize on-time payments, most student loans—private and federal—offer discounts to borrowers who sign up for autopay, sometimes called automatic debit. When you enroll in autopay, your loan payment will be deducted automatically from your designated bank account each month.
In exchange for ensuring you pay your loans on time each month, lenders typically reduce your interest rate, usually by 0.25 percentage points. That may not sound like much, but it can make an impact over time—especially for large balances. And select private lenders may offer even larger discounts; for example, PNC Bank currently offers a 0.50% rate discount to borrowers who enroll in automated payments.
Autopay Discount Example
Let's look at how this autopay discount can make a dent. Say you're borrowing $20,000 over a 10-year term with a 5% interest rate. Your monthly payment would be $212, and the total lifetime cost over 10 years would be $25,456.
If you sign up for autopay and enjoy an interest rate reduction of 0.25%, that brings your monthly payments down to $210. That $2 a month won't make a huge difference in the short term, but your autopay discount will save you $293 over 10 years.
Be aware that loan autopay is different from bill pay services you might use from a bank, where you set up automatic payments to be sent from your bank to a third party. Instead, this is an autopay service you arrange directly with your student loan provider.
How to Enroll in Student Loan Autopay
Because you'll enroll in autopay directly with your lender or loan servicer, the process can vary.
- Enroll online. Many lenders now allow you to log in to your online account and change your payment settings to enroll in autopay.
- Call your lender. If you can't make this change online or are running into issues, call your lender or loan servicer and ask them to walk you through enrollment.
Make sure the monthly autopay billing date works for your budget. You want to ensure that when the money is pulled, you have enough in your account and don't overdraw it. Be careful to schedule your autopay date to align with when income hits your account.
Also check with your lender about the process for canceling autopay if it ends up being too hard on your budget, since you may need to give advance notice. And don't forget to update your lender immediately if you change bank accounts to avoid a missed payment.
Additional Ways to Save Money on Student Loans
Student loans can be a massive financial burden, even for those well past their college days. If you're struggling to repay your student loans, here are some other ways to potentially bring down their cost:
- Refinance. If interest rates have taken a dive since you took out your loan, consider refinancing your student loan to a lower rate. Just keep in mind that you can only refinance student loans with private lenders, which means you'll lose out on federal loan benefits.
- Consolidate your loans. Consolidating your federal student loans can extend your repayment term or make payments more manageable by combining several loans into one. While it may not save you money right away, consolidating your loans could put you on stronger financial footing to help you pay down loans more quickly in the future.
- Look for loan forgiveness programs. The government offers some student loan forgiveness programs to individuals who take jobs in certain fields, often public service. The federal government also offers some loan forgiveness programs for those with disabilities.
- Find a sympathetic employer. As an employee incentive, some companies offer student loan repayment assistance. If you're in the market for a new job, find out if any potential new employers offer this perk.
- Consider income-based repayment. Those with federal student loans may be able to switch to an income-based repayment plan, which reduces monthly payments to 10% to 20% of your discretionary income. It also extends the repayment term to 20 or 25 years, with the balance being forgiven after. This isn't the best option for everyone, but it can provide relief.
- Make bi-weekly payments. If you can pay half your loan payment every two weeks, rather than once a month, it works out to a full extra payment a year. This can help you save money on interest over time.
- Pay off your loans early. If you're able to get on a tight budget and put more money toward payments now, you'll reduce how much interest you pay for the life of the loan and get them off your plate sooner.
Another Autopay Perk: Improving Credit
Setting up your student loans on autopay does more than nab you a discount on your interest rate. It also guarantees that your monthly loan payments will be on time, every time (as long as you keep enough money in the connected bank account).
Your payment history is the largest factor in your credit score, accounting for 35% of your FICO® Score☉ . Even one missed payment can hurt your credit score, and frequent late payments can really drag it down. When using autopay, you're consistently paying on time, which in turn helps you establish or build a positive credit history. Your credit score may also begin to improve as your debt balance decreases. Free credit monitoring from Experian can provide a window into how your automatic student loan payments strengthen your credit over time.