Time is money, especially when it comes to paying your bills. Make a late payment on a credit card and chances are good that your interest rate will go up, in addition to any fees they’ll charge you for being late. Keep being late on payments, and your rate could soar (up to 35% in the worst-case scenario).
Luckily your student loan interest rates aren’t going to fluctuate based on missed payments, but you can still lose a lot of money if you’re late with your bill. Here’s how:
there’s something called repayment incentives, aka discounts or benefits. Different lenders offer different benefits, such as a 2% interest rate reduction, but the vast majority of these deals require 36 to 48 on-time payments before the savings kick in. In most cases, if you’re late on a payment, whether it’s the first payment or the last payment, you’re disqualified from the benefit permanently. That 2% interest rate reduction could have saved you a lot of money, and helped you to pay off your loans sooner. By taking away those savings, they’re sticking you with a different kind of late fee.
FinAid.org, an online guide to student aid, reports that less than 10% of borrowers ever qualify for the advertised repayment savings, thanks in large part to missed payments. And The Wall Street Journal reports that the most common missed payment is the very first one (think about it — you’re graduating, moving around, your mailing address is not exactly stable). Even the CEO of Sallie Mae recently admitted, “the bottom line is that less than 10% of borrowers will earn all the advertised repayment benefits.”
Want more bad news? Even if you do make it through the 48 on-time payment hurdles, which is quite an accomplishment, that 2% interest rate reduction is now only worth about 0.63%. According to FinAid, “This is partly because the discount is in effect for a reduced time period, partly because the interest portion of the monthly loan payment is lower the further you are into repayment due to a smaller remaining loan balance, and partly because of the impact of a discount on accelerating loan repayment.” (Read more about discounted discounts here.)
If your lender offers a repayment incentive based on timely payments, our advice is to make sure you’re ready for that first bill (and the next 36 to 48, of course). If you’re using automatic payment through your bank, make sure it’s glitch-proof. If you move, update your address with your lender pronto. Or if you’re not comfortable jumping through all these hoops only just to get 0.63% off your loans, find a lender that offers an immediate, attainable benefit and real savings you can count on.