Fun with Automatic Payments: The .25% debacle

Michael Lux Blog, Student Loans 2 Comments

The other day I spent an absurd amount of time trying to set up automatic bank withdrawals for a student loan.  It seemed like a good idea, because I wanted the .25% interest rate savings and I also wanted to make sure I would never forget a payment.  My experience was yet another reminder of the lengths that some lenders will go to in order to make a few extra bucks.

On the surface, this really should be an easy process.  Specify your bank account numbers, when you want the payments withdrawn, and how much; and you are done.  Unfortunately, nothing comes easy with student loans.  Instead of creating a simple process, this lender put up every roadblock imaginable to prevent automated payments.  The rules and procedures make it nearly impossible to avoid paying extra interest and possibly late fees.

A PIN number?

My first surprise was when I was instructed to create a PIN number to set up the payments.  This struck me as odd, because this number was never necessary for any other transaction with this company.  As far as I know, the PIN number is used exclusively for setting up automated payments.

Even though it seemed to be a hassle, I went through the steps of creating one.  This involved talking to a machine, a customer service representative, and an e-communications specialist.  At that point, I could log out, and then log back in to the student loan account.  Once logged back in, I was able to create the PIN and proceed forward.

Limited Options

When you set up automatic payments, you are not given a choice of the date in which the funds are withdrawn.  The only available option is the date the payment is due.  This is troubling for a number of reasons.  First, because interest accrues each day, the optimal time to make payment is when the money is available, rather than the last possible day.  By waiting until the last second, the lender squeezes out ever possible penny of interest.  The second problem is that due date payments are a risky endeavor.  If you have an issue with your bank, a technical glitch, or any other problem, you will be stuck paying late fees.  If the borrower had the option of making the automated payment a week early, these issues could easily be addressed before late fees become an issue.

Don’t Forget the Fine Print

Another major issue with the automated payments is that there is no way of knowing when it has been properly set up.  At one point, it says that it takes 20 days to be put into place.  This alone is ridiculous, because they could pull the money out immediately if they wanted to.  However, if you keep reading things actually get worse.

The fine print at the bottom of the page explains that it could take a full two billing cycles for the automated payments to go into effect.  As a borrower, this puts me in a terrible position.  As noted earlier, the only date I’m allowed to pay is the due date.  If I was to rely upon the 20 day number that was perviously given to me, I might miss a payment and get hit with late fees.  However, if I make individual payments, assuming that the automatic payments won’t go through, the possibility exists for a double payment.

By using language that is inconsistent, or at the very least ambiguous, borrowers a placed in a precarious situation.  Guess wrong, and you will be paying late fees or making a double payment.

Why all the hurdles?

It probably isn’t an accident that all these road blocks are in place.  The lack of options on payment date could mean that the average borrower pays a couple extra bucks each month.  Over the course of the loan, that adds up to a decent chunk of change for each borrower.  For the lender, that is huge money when you think about all the students the policy affects.

If you combine the extra interest generated, plus the extra late fees that will inevitably be incurred, the lender is likely making a handsome profit.  They may offer you a .25% interest rate savings, but there is plenty of reason to suspect that this “feature” is a source of additional income for some student loan lenders.