Pros and Cons of Auto-Debiting Loans

These days, a majority of college students find themselves having to take loans out to assist in their tuition payments. Most of these loans are to be completed in installments over a long period of time after graduation. If you’re the type of person, like yours truly, that finds paying bills to be stressful or hard to remember, you might want to consider automating your student loan payments. Simply put, this means your debts are set up to pay themselves, instead of you manually having to transfer money to the source of your loan ever so often. However, there are drawbacks to this process, which seems simple on the surface. Here’s a partial list of the positive and negative aspects of auto-debiting loans:

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Pro: Payments ensured to be on time

Like we discussed above, some people have a hard time reminding themselves to do something as crucial as paying bills. An auto-debit loan program takes this concern completely off the table by presetting your payments each month. You won’t have to worry about setting reminders in your daily planner or tying a string to your finger; all you have to do is sign some forms. Then, your money will be sent directly towards paying off your loans. This ease in repayment is arguably the biggest plus of auto-debiting plans.

Con: Requires oversight

While it’s true that when you auto-debit your loan, it requires less manual action than a traditional repayment plan. However, you still have to be aware of the plan’s effect on your finances. If you set your plan to auto-repayment, you must, must ensure each month that your bank account will not be drained by the installments. You do not want to overdraw from your account. That can result in fines or long processes to rectify the insufficient funds. Although you can rest assured that your payments will be made on time, you cannot turn a blind eye to your finances for the duration of the program.

 Pro: Reduced interest rates

If you took out a loan from the US federal government’s FAFSA and CSS program and choose to repay it by auto-debiting, you’ll be rewarded, albeit in a small manner, by an interest cut. The government sets this reduction at 0.25%, which might seem like a negligible difference. However, if you take into account the average FAFSA interest rate of 6.8%, as well as the average loan amount for an undergrad ($28,000), this can cut your interest payments by over a hundred dollars. It might not seem like much, but recent college grads need all the financial help they can get.

 Con: Auto-debiting is a large commitment

Once you sign your name on the line for an auto-debiting plan, there’s really no going back. This ties nicely into the previous point about being careful with your bank account; you must be one hundred percent sure this is the route you want to take. When dealing with an entity as large and complex as the US Department of Education, it is vital that all your payments go through on time, and you cannot risk getting cold feet later on. You should solidify your plans before deciding this is the way to go.

Pro: Increased control

When you auto-debit your loan, you have the option to pay over your monthly dues in order to speed up the payment process. For instance, if you come into a large amount of cash by winning the lottery (or, more likely, a bonus at work), you can shuffle some extra money towards your loan repayment to ease your burden later. This perk is not necessary for all that choose to auto-debit their loans. But, some find it helpful to be proactive with any unexpected financial windfalls.

Con: Decreased flexibility

Now, this might seem directly in opposition to the last point. But, there is a key difference between control and flexibility in this sense. Increased control means you can change certain things about your plan, while a lack of flexibility means you cannot change everything about your plan. For example, your expected payments will come out of your account no matter what; you can’t “freeze” your plan or appeal to your creditor for more time. As we already said, an auto-debiting plan is a large commitment. However, if you go about it correctly, it can greatly ease the financial pressure you will face after college.

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