Student Loan Hack: Pay when you get paid

Michael Lux Blog, hacks, Student Loans 2 Comments

Today we are unveiling a new feature at the Student Loan Sherpa.  From time to time we will be writing brief articles with tips and tricks, aka hacks, to help you pay off your student loan debt faster.  These “hacks” won’t get you to a zero balance tomorrow, but they will help you get to a zero balance just a little bit quicker.

Pay when you get paid

The idea behind this hack is pretty simple.  Make your student loan payments the day you are paid, rather than on the due date.  When the money sits in your checking account, it collects very little, if any, interest.  As soon as you make your payment, your student loan balance drops and you pay slightly less in daily interest.  Thus, the sooner you make your payment, the less interest you pay.

Applying this method will not immediately make a noticeable difference.  Over time however, the benefit will start to add up.  Especially if you have a large balance and/or high interest rates.  Think of it like turning off the sink while you brush your teeth.  Your water bill won’t drop drastically, but over the years you will use less water.

If you want to figure out how much money you will save, calculate your daily interest rate.  Each day you will save the money you paid early times your daily interest rate.  As an example, if your monthly payments was $500 and you had an interest rate of 6.8%, by paying early you would save just over 9 cents per day.  While that doesn’t seem like much per day, if you pay 3 weeks early every month, at the end of the year, you will have saved over $23 just by shifting your bill paying habits.  If your payments or interest rates were higher, you could save significantly more.

Be on the lookout…

Many loan servicers will offer a .25% rate reduction for paying your loans through automatic debit.  Often the lenders will make these automatic withdrawals the day the loan is due, in order to maximize their income.  The question you will have to decide for yourself is which route will save you more money and more headaches.  Both the early payments and the auto withdrawals have advantages, but both can also cause headaches.

The other thing to keep in mind is that you don’t pay so early that it is counted on the previous billing cycle.  For some lenders this will not matter, for others it will.  It all depends upon how they process the payment.

Bottom Line

The best way to take advantage of this hack is to keep it in mind when you schedule your payments.  If you log on to your student loan page and are scheduling a payment, pick the earliest date you can.  Don’t push it back 10 days to the date the bill is due.  It may seem like you are keeping that money longer, but all you are really doing is putting a little bit of extra money in the hands of your lender.