3 Clever Ways to Pay Off Student Loans Faster
Chances are about one in 10 that you’ll default on your student loans.
That’s the default rate of student loan borrowers in the U.S., according to the latest figures from the U.S. Department of Education.
Borrowers enter default when they go more than 270 days without making a payment on their federal student loans.
The effects can be life-changing. And not in a good way.
Credit scores will drop, to begin with. It will affect their ability to get loans for years to come.
Borrowers can also have their wages or government benefits garnished.
On-Time Payments Are Important
The best way to avoid defaulting on your student loans is simple: pay them on time each month.
That’s easier said than done. If you’ve lost a job or borrowed too heavily, it can be difficult to make those payments.
Or maybe a global pandemic caused a recession.
The good news there is that student loan payments have been put on hold by the federal government through the end of 2020.
Unless the break is extended, repayments will start again in 2021. Once that happens, it may be a good idea to set up automatic payments so that you don’t become part of that 10% who default. It can also be used to pay off loans faster.
Autopay is when you set up payments to be automatically sent by your bank to your lender. You don’t write checks yourself and send them through the mail each month.
Here are three ways to set up automatic payments:
1.Online From Your Bank
You may already be paying bills online from your bank automatically each month. Adding a student loan to an auto-debit payment isn’t hard.
Automatic payments can be set up online or through your bank’s app. Just enter your lender as a payee and set up the amount and date you want the lender to be paid each month.
Only you can set up this type of payment. You can change it to include extra money if you get a raise, or can reset the payment date to coincide with your payday. Just make sure you have enough money in your account when the autopay is set to go through.
You can also pay the monthly bill online and not have it be on autopay. Use text, email and other alerts from your bank to remind you when the payment is due.
To avoid late payments through autopay or doing it manually each month, be sure to include enough time for your bank to make the payment. Allow at least a few days between your online payment and the loan’s due date.
Online payments can take a few days or more to process because the bank typically prints an authorized check and sends it to the payee by mail. Ask your bank and lender how long a payment should take to complete.
2. Automatic Withdrawals by the Lender
This can be the fastest way to automatically move money from your bank account to your loan servicer without ever missing a due date.
Automatic withdrawals by the lender are authorized by you once by giving details of your bank account to your loan servicer.
As with other autopay methods, you’ll need to make sure there is enough money in your bank account when the withdrawal is scheduled to be made. If not, you’ll likely face fees from the bank and lender.
You may already have something similar to this with other businesses, such as phone carriers. Some may give you a price break for paying automatically each month and letting them pull money from your account.
Some student loan servicers also offer deals for automatic payments. A 0.25% rate reduction is common by federal student loan servicers and private lenders. This gives you a lower payment, or can be used to pay off the loan faster.
A downside is you’re not controlling the payments. Ending them can be a hassle, as are most automatic payments through businesses. Expect to wait a month for changes to take effect.
3. Credit Card Bill Pay
Credit card payments aren’t accepted by many federal student loan servicers, but private lenders or loan refinance companies do.
If credit card payments are accepted, then automatic monthly withdrawals from the card will probably be required. This ensures the loan is paid on time, which is a good thing for both parties.
Another benefit to you is that you could earn rewards points through your credit card. This shouldn’t be the main goal of paying student loans automatically with a credit card, but it’s a good side benefit.
A credit card payment also gives you another month to pay the bill, since credit card bills can arrive up to a month after the charge is made.
The downside is pretty big, however. If you don’t pay the credit card bill in full and on time when it’s due, then you’re paying interest on a loan that you’re already paying interest on.
Another drawback is that credit card processing fees may be passed on to you by your lender, which would negate any rewards you earn for spending more on the card.
Using Autopay to Pay Off Loans Faster
If you can afford to, setting up extra automatic payments can pay off your student loans faster. You may not even miss the money from your checking account if an extra automatic payment is set up each month.
To do this, set up an extra automatic payment every month of whatever you can afford. It could be $200 or so extra each month. If it fits within your budget you won’t miss the money now, and you’ll see your student loan debt disappear sooner.
Another option is to make payments every two weeks. This adds up to 26 payments per year, or 13 full payments. That’s one more payment than the regular 12-payment cycle in a year. It’s not a huge hit to your budget and will pay down your student loan debt a little faster.