Is It Worth It? – The 0.25% Student Loan Interest Rate Reduction

- - Getting out of debt
0.25% interest rate reductionI’ve been getting some questions lately about whether or not the 0.25% interest rate deduction some student loan companies offer when you sign up for automatic payments is worth it. I’m sure there are more of you with the same question, so here it is.
While I love the idea of making personal finance “easier” through automation, I am not a fan of automating certain bills. One of them being student loans.

 

When I got into student loan debt, I wasn’t thinking about the tough road ahead to get them paid off. I didn’t research anything, look for cheaper interest rates, find ways NOT to need student loans to go to college, etc. I was just flat out LAZY.When I get into something because I was being lazy, I don’t typically like to allow myself to forget about it. I think it’s one of those things that you should pay a lot of attention to, thus the reason I’m not a fan of automating student loan payments.
But what about that convenient, little 0.25% interest rate deduction a lot of loan companies give you for automating your payments?
After screwing myself over and getting into $72k in student loan debt, I’ve learned my lesson and want to see the numbers. 🙂 I’d just rather pay my bills when I would like to and be done with it.
The feeling of being locked into making a payment on the same exact day every month, doesn’t sit well with me for some reason. I like the flexibility of making these payments a few days early if it works out that way based on my payday.

It sounds like a measly, little discount doesn’t it? How could a quarter of a percentage point make any difference whatsoever?

This is an example I came up with just to give you an idea of what kind of a difference this small deduction can make. Let’s say you have a $50k student loan at 6.8% interest.

 

Without Discount
Loan Balance: $50,000.00
Loan Interest Rate: 6.80%
Loan Term: 15 years
Monthly Loan Payment: $443.84
Cumulative Payments: $79,891.81
Total Interest Paid: $29,891.81

Now let’s look at the numbers with a 0.25% discount applied to it.

With Discount
Loan Balance: $50,000.00
Loan Interest Rate: 6.55%
Loan Term: 15 years
Monthly Loan Payment: $436.93
Cumulative Payments: $78,647.16
Total Interest Paid: $28,647.16
These numbers were calculated using the federal loan calculator.

 

How it Breaks Down

Over the course of the loan, you would end up paying $1,244 less in interest. Yes, that’s only about $100 a year savings, but when you have $50k in student loan debt, every bit helps. To get the loan paid off in the same 15 year time frame, you would pay $6.91 less each month.
I’ll take it!
I always had the thinking that if I wanted to get this debt paid off faster, I should be making payments whenever possible. Which is true. However, that doesn’t mean you should miss out on an interest rate deduction, no matter how small, because in the end you’re saving money.

A side benefit of this automatic payment deduction is the fact that it will be almost impossible for you to miss a payment, unless of course you don’t have enough money in the bank. The student loan company will be responsible for pulling the money out of your account from here on out. This could have added savings benefits because you won’t mess up your credit score by missing a payment, or paying it late. No late fees here.

There isn’t really a catch to this one aside from the fact that you have to be responsible enough to always have the cash in your bank account on the day this payment gets taken out. Seems easy enough, but it was definitely a transition for me at 22 years old.

Some people don’t like letting the student loan companies have access to their personal information, and I agree with this one when it comes to credit card companies. But with student loans, there is no dismissing them in bankruptcy or making a deal with them, so they are going to get the payment whether they take it from your paycheck or your bank account.

After all of my research, I have to eat my words about not automating student loan payments on this one. It’s totally worth it. It’s up to you, but I think the numbers make sense here. 

Tell us what you think about the interest rate reduction in the comments below!

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Chenell

I am Chenell Tull and so far, I've had a pretty rough time with my student loan debt. Recently, I've figured out a more productive "get out of debt" plan and the goal is to pay off over $60k in just 36 months. If you want to learn more, subscribe to the mailing list and get FREE updates on my successes and failures on this journey out of debt. 

  • Hi Chenell,

    I love reading your articles. There are some really good advice here. As I’m working my way to pay off a 300,000 dept. I would like to share your articles with my following; whom I believe will benefit as well. It would be really helpful if you can add some social share buttons to your content. Cheers.

    • Thanks for stopping by – and for the kind words! $300k is a pretty hefty debt. Does that include a mortgage? Thanks for pointing out that my share buttons disappeared, they should be back now! 🙂

  • Amy

    Both my husband and I have our student loans on automatic payment, and I love it. The downside for me is that since I never have to access our accounts, (except to print tax forms once a year), I don’t know what the balances are. The same goes for our remaining car loan. There’s not really anything wrong with this, but I always feel like I should know those numbers. In my mind, though, this is outweighed by the convenience of automatic payments. (And I did get the 0.25% interest reduction when I signed up for the service.)

    • Hi Amy! I definitely agree with you on the benefits of some automatic payments. However, I do keep a pretty constant eye on my balances every week. Have you tried using Mint.com or Personal Capital? Using these almost forces me to look because everything is laid out there. Also, the way I keep track of my bills helps me stay on top of them too. Here is how I keep an eye on them: http://www.brightcents.com/the-best-way-to-keep-track-of-your-bills/

      • Amy

        I know this makes me sound old and square, but I’m still a little squeamish about using a tool like Mint. I’m checking out your link about bill-tracking now…

        • Haha, no worries. I understand that feeling. They do use bank-level encryption though. I’ve been using them since 2011 and haven’t had my ID stolen yet…I hope I didn’t just jinx myself. Anyways, writing out your bills is a great method, too. I just like being able to see every transaction for the last 12 months in a few clicks. 🙂 I’m sure there are other methods for this too.

  • This is such great advice Chenell! I was lucky enough to graduate debt free, but my fiance has an enormous load of student loans so it’s still a subject I’m very invested in. It really is a numbers game, and your game plan is looking pretty good!

    • Thanks, Anum! While it is a numbers game, it’s also a very heavy mindset game – emotions can play a big part when it comes to finances. I’m sure you’ve set out a great plan to pay off that debt! Let me know if I can be of any help!

  • Adi

    Goodness, the interest rate on student loans in the UK is (I think) 1.5%. Quite a difference there, and it must prompt a change in approach. I think here, many regard it as almost the cheapest kind of credit you’ll ever get (certainly compared to mortgages or credit cards), so if you’re going to be in debt, you may as well max out your student loan.

    • I can see how some people would think that, but there are very distinct differences between student loans and other debt. For example, if you max out your student loan and end up with $200k in debt and a bill you can’t pay – there is no dismissing those debts in bankruptcy. A mortgage or car loan, however, can be dismissed in hardship through bankruptcy.

      Honestly, in the US you can get a car loan for 1.49%, while the student loans are at a much higher rate right now – around 5%+ It’s counterintuitive if you ask me, for a nation that wants to educate it’s citizens. 🙂 It’s also quite a big difference compared to your UK rates. I appreciate you sharing that insight, I was not aware of how low they are over there!