It is soapbox time here at the Student Loan Sherpa. Most of our time is spent offering suggestions and strategy to borrowers, but today we have some suggestions for lenders and federal student loan servicers.
Automatic payments are one of those things that make life easier for borrowers and for lenders. An automated payment gives a borrower one less thing to worry about and it increases the odds that a payment will be made on time. The benefit to lenders is so significant that many offer a .25% interest rate discount to borrowers enrolled in auto-payments. With so many benefits to all parties involved, it is unfortunate that so many lenders do such a lousy job handling automated payments.
Rather than just criticize we have some suggestions:
Don’t wait until the day the bill is due to process the payment – Many automated payment programs allow borrowers to pick the day in the billing cycle that the payment is processed. This is a great feature. Unfortunately, many lenders and servicers do not provide this option. Many wait until the day the bill is due.
The problem with waiting until the last second is that if there is any sort of issue, the end result will be a late payment. If the payment was initiated 5 days before the bill was due, borrowers and lenders who run into a technical or financial glitch would have time to resolve the issue before any deadlines were missed.
Don’t show the payment as being late when it is not – Another problem with waiting until the very last second to process the payment is that the borrower’s online portal can show that a deadline was missed, even though it wasn’t. We saw this issue with FedLoan Servicing. Unless there was an issue with the payment, a borrower who is enrolled in automatic payments should never see that they missed a payment or that they are delinquent.
Communication is critical – Before any funds are withdrawn from a bank account, send the borrower an email letting him or her know exactly how much will be withdrawn and when it will take place. These notice emails require almost no effort and cost very little… but they provide a great value to borrowers. They also help avoid unpleasant surprises and overdrawn accounts.
Be Consistent!! – Some lenders stop automated payments if the amount due changes. Others continue the withdrawals regardless of the payment amount due. There are pros and cons to both approaches, but it is really important that the procedure is consistent.
We recently helped a borrower who was enrolled in auto-payments on her federal loans. Because she was enrolling in REPAYE from another income driven repayment plan, she had to make a $5 payment while switching plans (the absurdity of the need for the $5 payment is an entirely separate issue). Her loan servicer chose not to collect the $5 payment despite the fact that she was enrolled in auto-withdrawals. Then, because the payment wasn’t collected, this borrower was automatically bounced from any income-driven plan into the standard repayment plan. At that point the servicer sent en email stating that a payment that was nearly 10 times larger than the previous payments was going to be automatically withdrawn. In short: a reduced $5 payment would not be collected, but an incredibly large unexpected payment would be automatically taken.
Getting Automatic Bank Withdrawals Right is Essential
The relationship between a borrower and a lender is often acrimonious… especially in the eyes of the borrower.
Allowing a financial institution access to a bank account is a huge leap of faith. When lenders take more money than what a borrower expects, it feels like theft. When lenders fail to collect the auto-payment authorized by a borrower, it seems to the borrower as though it might have been an intentional “mistake” by the lender in an attempt to collect late fees.
Blindsiding borrowers is a major problem to the borrower and should be taken very seriously by lenders. Avoiding issues requires minimal effort by the parties involved and it can result in ideal outcomes for both the borrower and the lender.