Digit, the automated savings app, wants to help borrowers repay their $1.5 trillion in student loan debt faster.
Student Loan Payments, the app’s latest tool, allows users to allocate some of their automated savings to make extra payments on top of the user’s standard monthly bill. It works like this:
- If you have a Digit account, create a student loan goal and connect your loan account to the app.
- If you already have a student loan goal with Digit, you can change the settings to enable additional payments.
The app works with providers like American Education Services, Fedloans, Great Lakes, Navient and Nelnet, among others.
The average 2018 college graduate owes $29,200 in loans, according to the Institute for College Access & Success, the highest balance ever.
Digit works by analyzing a user’s spending and then automatically transferring money from a checking account to a savings account. Experts say automating your savings or loan repayments is the best way to meet your financial goals.
When to use an app to make additional student loan payments
After a free month-long trial, Digit has a price tag of $5 per month for new users, which might seem counter intuitive if the user’s goal is to save money. But it’s still “generally a good idea,” Mark Kantrowitz, a student loan expert, tells CNBC Make It in an email. “Federal and private student loans do not have prepayment penalties, so there are few potential downsides.”
To make the most of the prepayments, Kantrowitz says borrowers should connect Digit to their loan with the highest interest rate first, to save the most in the long term.
And make sure the lender knows that it’s an extra payment and not an early payment of the next installment. “Otherwise, the lender might skip the next automatic payment if the borrower is signed up for auto-debit [or] autopay.”
You could also try an app like ChangEd, which rounds up purchases to the nearest dollar and puts the change toward a user’s student loans.
When to skip Digit’s feature
If a user can comfortably pay more through Digit, Kantrowitz suggests increasing their automatic payment directly to the loan servicer instead.
“Borrowers should choose the repayment plan with the highest monthly payment they can afford,” he says. “This will pay off the debt quicker and also save a lot of money on interest.”
Plus, increasing the auto-payment, rather than waiting for an app to move the money for you, ensures that it will actually go toward your debt. It takes some of the friction out of the repayment process.
“Many borrowers, even wealthy borrowers, live paycheck to paycheck because their spending increases to consume all available cash,” says Kantrowitz. “Reducing available cash causes spending patterns to adapt, making it harder to spend the money on things you don’t really need.”