Making your student loan payments on time comes with many benefits. You might work toward qualifying for forgiveness (for your federal loans) or achieving cosigner release (for your private loans). Along the way, you should see your credit score rise, too.
But you could also receive an actual discount on your debt, simply for paying your bill before it’s due.
Although on-time payment discounts are few and far between, they’re worth a search.
What is an on-time payment discount?
As opposed to a loan feature that you receive automatically upon borrowing, an on-time payment discount is earned. To obtain it, you must make a specified number of consecutive payments on time.
Typically, the discount would arrive in the form of a decreased interest rate.
You don’t have to wonder how much an on-time payment discount would be worth. Say your lender or loan servicer, with whom you have a $30,000 debt to be repaid over 10 years, decreases your rate from 8.00% to 7.50%. That rate reduction would save you $945 in interest — no small chunk of change.
Rate reductions are especially valuable because they’re permanent, allowing you to save even more during your repayment. Plus, if you turned around and applied the $945 to make a lump-sum payment toward your debt, you could shorten your loan term by five months, saving an additional $1,024 of interest from accruing, according to our extra payment calculator.
Where can you find on-time payment discounts?
After the College Cost Reduction and Access Act diverted subsidies away from student loan companies, federal loan servicers and private lenders gradually phased out discounts for prompt payments.
These programs were once quite robust: Federal Stafford Loans, which have been replaced by the federal direct loan program in recent years, used to come with a 2.00% rate decrease following four years of prompt payments. Similarly, the Massachusetts Educational Financing Authority offered borrowers three rate reductions of 0.50% each after timely payments for 24, 36 and 48 months, respectively.
Lenders also offered these discounts in the form of principal balance reductions, account credit, cash and rebates. A rate reduction, however, is the most valuable because it’s a permanent change to your account, resulting in continued savings.
Nowadays, it’s more difficult to find this perk among lenders. MPower Financing is an exception, offering a 0.50% reduction on your interest rate after six months of prompt payments. From your seventh monthly payment on forward, your rate would fall, creating potentially significant savings.
Whether you’re seeking a private student loan or are considering student loan refinancing, ask lenders about whether they offer on-time payment discounts. It could be one factor that helps you choose the best lender for your repayment.
The next best alternatives to on-time payment discounts
Generous on-time payment discounts have slowly been replaced by one-time autopay discounts, among both federal loan servicers and private lenders. If you can’t find a lender offering one, chances are they offer the other.
All nine of the current federal loan servicers offer a 0.25% rate reduction immediately upon enrolling in autopay, and most reputable banks, credit unions and online companies at least match it.
Instead of rewarding you for making payments, setting up autopay ensures you’ll never miss one (as long as you have enough money in your bank account, avoiding overdraft). Typically worth a 0.25% or 0.50% reduction on your fixed or variable interest rate, autopay is a great way to save.
Finally, some private student loan companies offer rate reductions and cash awards for your grade point average and for graduating from your program. Student loan and refinancing companies also provide a similarly sized rate reduction for opening a connected bank account, plus cash for referring a friend.
Ask about lenders’ discounts before you agree to borrow, pitting them against each other to ensure you find the best deal.
Reduce your rate and rack up savings whenever possible
There are plenty of ways for lenders to ding you if your repayment goes awry. The consequences start with late fees and potentially lead to a default, garnished wages and worse.
So when your repayment is going right, on the other hand, you should be rewarded for it.
On-time payment discounts are more difficult to find than they used to be. Still, you can score significant savings through discounts for autopay, good grades, graduating and banking. They’re just as valuable if they reduce your interest rate, even by only a fraction of a percentage point.
As you shop around, put the onus on lenders. Ask about what happens when your payment is late — and what occurs when you’re consistently on time. If you’re unsatisfied with their answer, it might be time to move on to a competing lender.
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Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print to help you understand what you are buying. Be sure to consult with a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time.