Using Savings Sub-Accounts to Save Hundreds on Student Loans

The time has come: May is the first month that my first student loan bill is due. I have three student loan bills, actually, and indentifying them now will make this little tale easier to tell:

• The first is a Direct Stafford Loan, from the government, consisting of both subsidized and unsubsidized loans. It is the culmination of the Stafford loans that I took out from the beginning of college until the time I dropped out. I call it the “Old Stafford” loan.
• The second is also a Direct Stafford Loan, serviced by the same online account and login. It’s the culmination of the subsidized and unsubsidized Stafford loans that I took out from the time I returned to school until graduation. I called it the “New Stafford” loan.
• The third is a Federal Perkins loan, issued with my college as the lender. I have to use a different website and login to access information and pay this loan. This is the “Perkins” loan.

This month, the Old Stafford loan comes due. The New Stafford loan and the Perkins loan are both in their grace periods, so I won’t have to make any payments on them until at least September.*

The Stafford loans have put forth an intriguing proposal for me: set up an Electronic Debit Account (EDA) to automatically take the loan payments from my bank account each month, and they’ll shave 0.25% off of my interest rates. Many people take this option because 0.25% can have a big effect, if you have a lot of loans. I did the math for my combined Stafford loans (using my ultra geeky financial calculator):

If I pay the loans off in 10 years….
Interest paid: $10,207.89
Interest —0.25%:  $9,695.48
Money saved: $512.41

If I pay the loans off in 25 years…
Interest paid: $28,375.39
Interest —0.25%: $26,840.27
Money Saved: $1,535.13

So we’re not exactly dealing with chump change here. Depending on how long it takes me to pay off these student loans, I will save $50-$60 per year if I sign up for this program.

However, there’s a catch. For me, anyway. I hate automatic debits out of my checking account. In fact, I have a few set up to try and parse my savings out to online savings accounts right now… and I’m in danger of over-drafting over the next few days because of them. Automatic debits work well for some people, but I handle them badly. Which means I have to choose: is $50/year worth a headache for me?

Luckily, the Direct Loan program has the solution for me. They give you the option of having your EDA set up with a savings account instead of a checking account. This is great for me — I could much better handle money coming out of one of my ING sub-accounts each month than straight from my checking account. As soon as I figured this out, I logged onto ING and set up a new sub-account specifically for student loan payments. If you’re not sure how to do this, it’s extremely easy.

To create a sub-account if you already have an ING Direct bank account:

1. While logged in, click “Open an Account” on the left side of the screen.
2. Choose the type of account you want your sub-account to be. For this particular purpose (student loan payments), I chose to get another Orange Savings Account.
3. Click “Open Now”
4. Select the type of account. For most people, this will be either an individual account, or a joint account (if you’re sharing it with a spouse, etc.).
5. Give the new account a nickname, so you’ll know what it’s for. For me, this was “Student Loan Payments.”
6. Chose one of your linked accounts to pull your first deposit from. I pulled in the amount of my first student loan payment from my already-existing Electric Orange Checking account.
7. Read and agree to the terms of service, click Open Account, and you’re done!

(If you don’t already have an ING Direct bank account, I highly recommend both their Electric Orange Checking and Orange Savings accounts. Especially because of this sub-account feature.)

Bing bang boom! The account exists instantly, and I can enter the account information into the EDA instantly. The only thing that isn’t instant is on my student loan issuer’s end – it says it will take 30-45 days for electronic debiting to take effect, so I’ll still have to make my first payment my hand, on my own.

So all’s well in the State of Stephanie’s Student Loans. I’ll save about $50 each year, and I’ll earn a little interest from the cushion I keep in the savings account. The only problem I’ve encountered is with the Perkins loan. Although they allow you to set up electronic debiting, they don’t allow you to do it from anything but a checking account. Boo! And I can’t find any mention of them giving me a discount on my rate for setting it up. So you know what? For now, I’ll just pay the Perkins loan by hand. (Well, by hand online. You didn’t think I was crazy enough to write checks and use stamps, did you?)

*I may pay extra toward the interest on the New Stafford loan during the grace period… but that is actually quite difficult. Because the Old and New Stafford loans are serviced by the same website, login, and account, I can’t tell the system which loan extra payments should go toward. It just splits up any extra payments evenly between the two loans.