As tough as it may be to repay your student loans, there actually are several incentives for you to pay off those college debts and to do so on time.
Essentially, you can get one or more repayment incentives as a way to encourage you to make those student loan payments in a timely fashion. Here’s how it works.
For starters, you can get a lower interest rate on your student loans anytime you do several things connected with repaying your debt.
You might make automatic payments through your checking account. You could have monthly deductions for your student loans taken electronically from a savings account. Or you could pay a certain number of payments on time. Any one of these things can qualify you for a repayment incentive.
Let me give you a couple of examples. For those who have federal student loans, the Direct Loan program offers two different types of repayment incentives. One gives you an interest rate reduction anytime you have automatic withdrawals from your bank to pay your student loan payments. The amount of the interest rate reduction you get is 0.25 percent.
So let’s say your student loan payments originally were scheduled to carry an interest rate of 5.25 percent. If you go ahead and tell your bank to automatically deduct your monthly payment from your checking or savings account, and you have payments to sent to your student loan holder or loan servicer, your new interest rate will now become 5.0 percent. This saves you money, especially if you’re paying loans for five to 10 years or more.
Another repayment incentive offered by the Direct Loan program is when you get an up‑front interest rate rebate. These apply on direct subsidized loans, direct unsubsidized loans, and on direct PLUS loans. (A PLUS loan is a Parent Loan for Undergraduate Students).
Basically, the break you get on your interest rate is an up‑front reduction that’s equal to a certain percentage of the loan amount that you borrow. Your paperwork that you received from your lender will specify if you have, in fact, received an up‑front interest rate rebate.
You do have to make sure that you make all your payments on time, though.
If you don’t make those first 12 required monthly payments in a timely fashion, you’ll lose that interest rate rebate. So in a way, that’s another incentive to motivate you to remain prompt with your student loan payments.
Another bonus of making electronic payments: there’s no need to spend time, money or effort buying stamps, writing checks, or going to the Post Office to mail off your student loan payments. You can just rest easy knowing the payment has made it in on time if you paid by automatic deduction.
Right now, undergraduates with Direct Subsidized Loans who first received those loans between July 1, 2011, and June 30, 2013, have loans with a 3.4 percent interest rate.
The interest rate is 6.8 percent for Direct Subsidized Loans for graduate students and Direct Unsubsidized Loans for all students. And Direct PLUS loans carry an interest rate of 7.9 percent.
Finally, if you have a loan in the FFEL program, a lender could also offer you some incentives for making your payments on time with regard to your student loan obligations.
Again, some of them give you lower rates based on your automatically deducting payments from your bank accounts, or simply from making a set number of payments on time.
You’ll have to contact your lender directly to find out what exact incentives they offer through FFEL programs. FFEL stands for the Federal Family Education Loan program.
Although no new loans are being made under this program as of this writing (in 2013), it is possible that you may have old FFEL loans from years past.