Student Loans with Automatic Payments: Helpful or Harmful?

Student loan borrowers have enough to worry about with their student loan payments. One convenient way to make repayment easier is setting up automatic payments for your student loan. This leaves one less thing to worry about, and it will send your monthly payment to your lender or servicer on time. 

Many loan servicers offer a 0.25% interest rate reduction for enrolling in automatic payments. Well, that’s the thought, at least. But what we’ve found in our January 2024 Student Loan Planner Reader Survey is that borrowers are facing complex issues. Some of these concerns include incorrect payment amounts or payments being naked as late, with little support from their loan servicers. 

Learn more about auto-debit and what to consider. 

How auto-debit works for student loan payments

Auto-debit or auto-pay refers to automatic payments. Instead of making a manual student loan payment, enrolling in auto-debit automatically deducts your monthly payment amount from your bank account on a specific date. 

Generally, this auto-withdrawal repeats at a cadence you’ve pre-set; typically, borrowers choose to set their auto-pay every month. You might choose to set the withdrawal date to a few days before your due date or on the recurring due date for your student loans.

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Weighing your options: Pros and cons of student loan auto-pay

Setting up auto-pay for your education loans takes one to-do item off your plate each month. But you’re essentially putting your monthly payment into the hands of your loan servicer, and issues can arise. 

If you’re thinking of enrolling in auto-pay through your lender or student loan servicer, weigh the pros and cons first. 

The upsides of choosing automated student loan payments 

• It’s convenient. Using student loan auto-pay, you don’t have to think about making payments. 
• You might get a rate reduction. Borrowers can get a lower interest rate with auto-pay, which shaves off 0.25%. 
• It saves time. Auto-debit lets you avoid time spent making manual payments. 

Potential pitfalls of student loan auto-pay 

• It risks potentially overdrafting. If you don’t have enough money available in your bank account, student loan auto-pay could result in overdrafting. Overdrafting a bank account can lead to costly fees.
• Changing payment dates takes time. Sometimes borrowers need to change their payment date for cash flow and budgeting purposes. Making this type of change to your auto-pay schedule can take one to two billing cycles in some cases. 
• You might face processing mistakes. As we found through our January 2024 Student Loan Planner Reader Survey, auto-pay can result in potential payment mistakes, like servicers marking on-time payments as late, withdrawing the wrong (i.e. higher) payment amount, or not applying auto-pay discounts. 

When auto-debit gets tricky: Common hurdles to look out for

Auto-debit can be convenient for some borrowers, but for others, it can be rife with frustrating issues and bureaucratic red tape. Here are some common hurdles that student loan borrowers report experiencing with automatic student loan payments. 

Incorrect interest rates and debit amounts

One of the main benefits of setting up your student loans with automatic payments is the interest rate reduction benefit. Over time, lowering your rate by 0.25% can help you save a notable amount on your education costs.  

But some borrowers aren’t getting this discount as promised. A survey respondent described their experience with Aidvantage auto-pay as being “slow to process,” highlighting issues with receiving their interest rate discount after enrolling in auto-pay.

Another borrower said that the auto-pay discount “is distributed at random between all loans…” and that they’d prefer “… to pick which loan balance it goes towards.”

A major issue borrowers are struggling with is that servicers are auto-debiting higher payment amounts than is owed. One borrower surveyed lamented, “When MOHELA reactivated the account, they just started taking auto-payments, my credit score went down because they raised the amount that I needed to pay every month.”

What to do if this sounds familiar…

To help combat these issues, review your current loan’s interest rates on StudentAid.gov dashboard. Federal loans from the U.S. Department of Education have fixed rates. If you have private student loans, log in to your lender’s online portal to view your monthly statement which should disclose your rate. 

With this information, you can easily calculate what your discounted rate should be with the auto-pay deduction and uncover if the rate hasn’t been applied. If there’s an issue, contact your loan servicer and document your entire conversation until your concern is resolved. 

If you think the auto-pay amount due is incorrect, use a student loan calculator to check what your payments should be and compare it to your billing statement. If you discover a discrepancy, contact your loan servicer immediately, and see if you can pause auto-payments until the amount is corrected.  

Problems with billing 

One borrower surfaced a frustrating and unusual billing error. “I receive a monthly bill that shows a different amount than what I am charged in auto-payment,” the respondent said. “No one at the company can figure out why and any call backs never actually happen.”

“I receive a monthly bill that shows a different amount than what I am charged in auto-payment. No one at the company can figure out why and any call backs never actually happen.”

January 2024 Student Loan Planner Reader Survey

Another borrower had issues with payments being reported as late or missing, despite payments being auto-debited from their bank account. This is problematic since late payment data on your loan accounts can harm your credit, if reported to credit bureaus, and might lead to late fees.  

What to do if this sounds familiar…

For billing issues, document every auto-debited payment and their amount that’s withdrawn from your bank account. Gather student loan payment confirmations or bank account statements as proof of on-time payments that your loan servicer can review during their investigation. 

These documents can also help you dispute these reporting errors on your credit reports, if needed. 

Challenges with starting (and stopping) auto-pay

A common issue that student loan borrowers from our January 2024 Student Loan Planner Reader Survey faced is trouble actually signing up for auto-debit. One borrower noted that it took multiple attempts to sign up for automatic payments. Another borrower was frustrated that their servicer’s auto-pay function wasn’t working altogether, and that customer support wasn’t helpful in this regard. 

While some borrowers had trouble enrolling in auto-debit features, others were unceremoniously kicked off auto-pay. 

In a separate situation, a borrower had this to say about their servicer, MOHELA: “They unenrolled me in auto-pay and then threatened to penalize me for any late payments.”

Another borrower with loans with Aidvantage also mentioned being unenrolled from auto-pay. Regardless of whether you’re having trouble getting started with auto-pay or getting removed from it, the experience can put your monthly payments in uncertain territory. 

What to do if this sounds familiar…

You’re supposed to get a notification ahead of your auto-pay withdrawal. When you do, check to see that the payment went through after its scheduled draw date. 

If trying to sign up, note that it may require multiple billing cycles to initiate the first automatic payment. Unfortunately, this requires persistence to make sure your loan servicer is helping you set up your student loans with automatic payments — and keeping you there. 

Loan servicer scorecard: How does your servicer rank for auto repayment?

Automatic payments for your student loan are handled through your loan servicer. Based on our survey, some loan servicers manage their auto-pay processing better than others. 

Below are the loan servicers that are reportedly having issues, according to borrower respondents, along with the specific complaints that were raised in our survey. 

How federal student loan servicers measure up in auto-debit

Right now five loan servicers manage federal student loan repayment.  Four out of five servicers were mentioned in relation to auto-pay complaints. The results of our survey revealed that the worst two offenders are MOHELA and Nelnet. Here’s what borrowers had to say: 

“They have completely mishandled my IDR plan change to SAVE, including debiting my account at my prior (IBR) monthly rate while my plan was on administrative forbearance.”

January 2024 Student Loan Planner Reader Survey

MOHELA borrower feedback and insights

• Student loan payments were auto-debited after the pause and [they] couldn’t make changes on auto-debit until the payment went through. 
• There was no notice on auto-pay and two days after Christmas, there’s an auto-debit confirmation. 
•  I get emails regularly about an automatic withdrawal taken, then returned, for my monthly IDR payment of $0. I've also been moved to and removed from administrative forbearance without acknowledgement that an IDR plan has been approved.
• The auto-pay feature is slow to update and difficult to confirm if the student loan payment went through by the due date. 
• The auto-pay sign-up process took several billing cycles to go through. 
• They have completely mishandled my IDR plan change to SAVE, including debiting my account at my prior (IBR) monthly rate while my plan was on administrative forbearance.
• Signed up for auto-pay and the student loan payment was still marked late. 
• Paid off a loan with a manual payment and the auto-payment still went through later in the month and sent my bank account into the negative.
• I set up direct debit with MOHELA and it took them so long to approve it, and they provided different dates it would start, so I ended up paying late on my first payment.
• Loan servicer started taking auto-payments and raised the payment amount. 
• I was on hold for 2.5 hours one day just trying to get help with setting up my auto-pay.
• They unenrolled me in auto-pay and then threatened to penalize me for any late payments.
• I can’t make a payment when you [sic] have auto-pay on. I can’t change the date.

Nelnet customer experiences

• I tried to set my payment amount for auto-pay at a larger amount, and it was not allowed.   
• Can’t have auto-pay set up (lowers interest rate, guarantees I stay current) and make extra payments early in the month that count towards the required payment. E.g. required payment of $500 on the 25th of the month, I pay $1000 on the 15th, that should cover my payment and put $500 to principle but instead it puts $1000 to principle and still pulls my $500 on the 25th. Throwing off my budget that had $1000 for student loans, not $1500.
• Student loan payments were reported as late or missing despite auto-pay taking a payment. 
• I was recently billed automatically even though I did a manual payment. I did a manual payment because I saw something on my account say “overdue.”
• The loan servicer does not take auto-drafts on time. 
• Wish I could set up payments more easily. 
• Auto-debit issues, can’t reach anyone. 

“Student loan payments were reported as late or missing despite auto-pay taking a payment.”

January 2024 Student Loan Planner Reader Survey

Edfinancial autopayment performance

• Auto-pay is not working. 
• Auto-pay updates are slow and showed the student loan payment past due despite auto-pay.
• Auto-pay takes forever to process. 
• Received a monthly bill different than auto-payment and no one can figure it out or calls back.

Aidvantage insights from borrowers

• Issues with reduced interest rate for enrolling in auto-pay.
• Double check the status of auto-pay before responding to any “Late Payment” notices. Once paid, it can take a long time (6-8 weeks) to get a refund for overpayment.  
• Multiple attempts to set up auto-pay. 
• Unenrolled from auto-pay. 

Comparing auto-debit experiences with private student loan companies

Private student loans make up a much smaller share of the student loan market at just 7.52%, according to Enterval Analytics. Based on this data and our survey results, there were fewer complaints about auto-debit within private student loan companies. That doesn’t mean there aren’t issues, it just means statistically there’s a smaller sample size to pull data from. 

Navient auto-debit insight

• Enrolling in auto-pay, you need to submit a request, they think about it, potentially leading to missed payments thinking you’re set, feels predatory. 

Lendkey customer feedback

• Messed up automatic payments. 

Best practices for setting up your automatic monthly payment 

To set up your student loan with automatic payments, contact your loan servicer. Be aware that the process can take a couple of billing cycles; you’ll need to continue making manual payments until auto-pay is set up to avoid late payments. 

Choose a payment due date that works for your budget. For example, consider setting the payment withdrawal to the date after your payday. Once you’re enrolled, keep your checking account information current with the lender. Have a buffer of cash in your bank account, if possible, to avoid an overdraft in case you encounter a billing issue that’s described above. 

If you’re experiencing auto-pay issues, and your servicer or lender has been unhelpful in resolving them, there are ways to get your student loan dispute resolved. For example, you can file a complaint with the Consumer Financial Protection Bureau (CFPB). 

As an alternative to setting up automatic student loan payments with your servicer, consider adding recurring monthly reminders to your personal calendar. Set an alert for this reminder on or before your loan’s due date so you get your payment in on time. 

It’s also good practice to perform a personal finance check-in once a month. During this check-in, you’ll take a full check of your budget and transactions, and also confirm that all of your bills were paid. 

Student loan auto-pay: Balancing convenience vs. caution

Setting up your student loan with automatic payments can seem like a no-brainer on the surface. It’s convenient and can potentially save you money thanks to auto-pay rate discounts. However, as our survey revealed, it could also raise issues from enrollment challenges to serious billing concerns. 

If you’re not sure how to proceed, and want to evaluate your repayment options, book a session with a student loan consultant.