When you think of ways to save money, your student loan lender isn't one of the first places that come to mind. But if you sign up for automatic payments right now, you could be eligible for a discount and have more cash in your pocket.

If you sign up for auto-debit, which is a month offered by the majority of federal and private student loan lenders, you will get a decrease of 0.25 percentage points in your interest rate and have the amount of your monthly payment pulled straight from your bank account. This will save you money and guarantee you get all payments, provided you check to see that your bank account can manage the amount taken out. Additionally, if you decide to put those savings into investments, you can increase the value of your money even further.

Here's what those savings may look like: According to the most recent statistics from the Institute for College Access and Success, an average borrower who graduated in 2019 has a total outstanding balance of $28,950 in student loans. If the borrower in question started with an annual percentage rate (APR) of 5% on her loan and 0.25 percentage points lowered it to 4.75%, she would realize savings of around $423 over the length of a typical 10-year loan tenure.

Borrowers with larger loan amounts are better positioned to save money. According to the most current statistics that can be found on the website of the National Center for Education Statistics (NCES), graduate students had a median amount of debt of $71,000 in the 2015–2016 school year. Those with smaller balances won't see as large of a savings increase, but they will still earn some money back and have the opportunity to schedule their payments and then forget about them.

Auto vs. Manual Payments

In case you're wondering, "Forty-two dollars a year?" Who gives a damn? Think about how much you could save and earn if you didn't have to pay that additional interest. If you saved an extra $42 every year, you could do the following:

• Don't skimp on your Roth IRA. Suppose you make an initial investment of $500 and continue contributing $42 from your savings each year after that. Increase your balance to $1,512 after ten years if you earned a fixed rate of return of 7%.
• Accelerate the repayment of some of your high-interest debt, such as a credit card or personal loan.
• By giving your lender the instruction to use the funds in this manner, you may knock $42 off the principal of your student loan.
• You may be eligible for a tax deduction if you give money to a charity or political action group you support.
• Adding to your finances for unexpected expenses may help you feel even more prepared for a "rainy day."

Autopay Mistakes to Avoid

Allow Yourself the Necessary Amount of Time to Make Adjustments

If you wish to modify the conditions of your automatic payments, such as changing the account, it draws from or updating your payment date; you will need to make preparations in advance. Even though every lender is different, the majority of the time, you will be required to provide early notification for any alterations.

For instance, if you have an automatic payment set up with Earnest and want to modify the day it is due, you won't be able to do so via the account site. You would have to get in touch with customer service and ask them to make the adjustment, which wouldn't take effect for between one and two billing cycles after you did so.

Take Extreme Caution When Switching Bank Accounts

Be careful to update the settings for your automatic payments to reflect your new checking account if you move financial institutions and cancel your previous checking account. Your payment will only go through if the bank account that your autopay is connected to is currently being used. You must address this matter promptly to avoid being assessed a late fee and having a late payment recorded on your credit report.

Use Autopay, Not Bill Pay

The automated bill payments made available via your bank differ from the autopay you set up with your student loan lender, even though the two seem quite similar. Your bank will automatically transfer money from your checking account to the lender on the due date if you use the bill payment option offered by your bank. Using this strategy, you could still make on-time payments for your student loans, but some institutions would charge you a loan for providing this service. In addition, if you enroll in a loan in this manner, you would likely be qualified to get a reduction in the interest rate you pay on your student loans.