Best way to structure student loan payments for faster payoff?

[MochaDoc]

This may or may not be a straight forward question. I currently make four to five student loan payments per month:

First Friday: biweekly payment (1/2 total required payment for the month)

Second Friday: extra payment

Third Friday: biweekly payment (1/2 total required payment for the month)

Fourth Friday: extra payment

Between Fourth Friday and First Friday: Lump sum payment of extra savings after all bills, etc. paid for the month

My question: Do I save more money, and decrease # of months to loan payoff, with the above payment plan or does making 2 to 3 payments give me the same outcome with less hassle:

First Friday: biweekly payment (1/2 total required payment for the month) + extra payment

Third Friday: biweekly payment (1/2 total required payment for the month) + extra payment

Between Fourth Friday and First Friday: Lump sum payment of extra savings after all bills, retirement contributions, etc. paid for the month

I can give actual numbers if anyone has a customized excel spreadsheet ready where they can simply plug in the numbers. Alternatively, if you have a link to a debt elimination calculator that is set up for biweekly payments and extra payments made separately and together I'll plug in my own numbers. I've scoured the web and none of the readily-available calculators does what is needed.

I'm thinking the first repayment schedule is better due to interest accumulating for one week versus two.

[jhwkr542]

Since it looks like interest accrues daily instead of monthly, making payments as early as possible does save some interest. Probably won't amount to much in the long run but if you're looking at the bottom line, earlier payments are better.

[MochaDoc]

jhwkr542,

I agree.

After posting, I found a mortgage calculator (http://financialmentor.com/calculator/bi-weekly-mortgage-calculator-extra-payment) that accepts biweekly payments and extra payments. The effective, fixed interest rate comparison (and payoff schedule) is a bit of an eye-opening gem:

Single monthly payment: 3.5% (5-year payoff)
Single monthly payment + extra payments (all made at one time): 2.10% (3-year payoff)

Biweekly payment: 3.18% (4.6-year payoff)

Biweekly payment plus extra payments (2 payments a month): 1.9% (2.7-year payoff)

By extrapolation, my 4 payments per month should have an effective interest rate of ~ 1.6%. Math can be fun sometimes.

 

[Zaphod]

MochaDoc wrote:

jhwkr542,

I agree.

After posting, I found a mortgage calculator (http://financialmentor.com/calculator/bi-weekly-mortgage-calculator-extra-payment) that accepts biweekly payments and extra payments. The effective, fixed interest rate comparison (and payoff schedule) is a bit of an eye-opening gem:

Single monthly payment: 3.5% (5-year payoff)
Single monthly payment + extra payments (all made at one time): 2.10% (3-year payoff)

Biweekly payment: 3.18% (4.6-year payoff)

Biweekly payment plus extra payments (2 payments a month): 1.9% (2.7-year payoff)

By extrapolation, my 4 payments per month should have an effective interest rate of ~ 1.6%. Math can be fun sometimes.

 

Click to expand...

Exactly, which is why I try to tell people that if you dont like your rate its no big deal. You can always make extra payments to get to a rate that you feel fits your goals best.

[Craigy]

Sort of a strange way to look at it, but whatever floats your boat.   

The note continues to accrue interest at the rate on its face.  If you make extra payments, that's great, you're now borrowing less money, but the rate is still the rate.   

[MochaDoc]

Craigy wrote:

Sort of a strange way to look at it, but whatever floats your boat.

The note continues to accrue interest at the rate on its face.  If you make extra payments, that’s great, you’re now borrowing less money, but the rate is still the rate.

Click to expand...

Don't know if you're replying to me or Zaphod but I found the numbers to be interesting because making a single scheduled + extra payment once a month decreases the repayment period by 40% whereas biweekly payments only result in a 10% reduction in repayment period. This may be general knowledge but most of the personal finance blogs that I read recommend biweekly over monthly payments and don't really push making extra payments as a way to pay down a mortgage faster.

The effective interest rate side is interesting conceptually.  If you manage to consistently make extra payments every month until the loan is paid off then your effective IR should be less than the stated rate.

[MochaDoc]

Zaphod wrote:

MochaDoc wrote:

jhwkr542,

I agree.

After posting, I found a mortgage calculator (http://financialmentor.com/calculator/bi-weekly-mortgage-calculator-extra-payment) that accepts biweekly payments and extra payments. The effective, fixed interest rate comparison (and payoff schedule) is a bit of an eye-opening gem:

Single monthly payment: 3.5% (5-year payoff)
Single monthly payment + extra payments (all made at one time): 2.10% (3-year payoff)

Biweekly payment: 3.18% (4.6-year payoff)

Biweekly payment plus extra payments (2 payments a month): 1.9% (2.7-year payoff)

By extrapolation, my 4 payments per month should have an effective interest rate of ~ 1.6%. Math can be fun sometimes.

 

Click to expand…

Exactly, which is why I try to tell people that if you dont like your rate its no big deal. You can always make extra payments to get to a rate that you feel fits your goals best.

Click to expand...

The starting IR is important and should be a point of concern for a borrower. Most borrowers can only spare so much extra cash each month for student loan payments so the ability to get a lower effective interest rate this way is limited. If folks had an endless supply of extra funds, they'd simply pay the loan in full or not borrow in the first place.

[Zaphod]

MochaDoc wrote:

Zaphod wrote:

MochaDoc wrote:

jhwkr542,

I agree.

After posting, I found a mortgage calculator (http://financialmentor.com/calculator/bi-weekly-mortgage-calculator-extra-payment) that accepts biweekly payments and extra payments. The effective, fixed interest rate comparison (and payoff schedule) is a bit of an eye-opening gem:

Single monthly payment: 3.5% (5-year payoff)
Single monthly payment + extra payments (all made at one time): 2.10% (3-year payoff)

Biweekly payment: 3.18% (4.6-year payoff)

Biweekly payment plus extra payments (2 payments a month): 1.9% (2.7-year payoff)

By extrapolation, my 4 payments per month should have an effective interest rate of ~ 1.6%. Math can be fun sometimes.

 

Click to expand…

Exactly, which is why I try to tell people that if you dont like your rate its no big deal. You can always make extra payments to get to a rate that you feel fits your goals best.

Click to expand…

The starting IR is important and should be a point of concern for a borrower. Most borrowers can only spare so much extra cash each month for student loan payments so the ability to get a lower effective interest rate this way is limited. If folks had an endless supply of extra funds, they’d simply pay the loan in full or not borrow in the first place.

Click to expand...

Yes, to both of your guys' comments. Also, one can only get the interest rate offered by your credit quality and whats available, if you have a target you're more comfortable with paying extra is an easy way to achieve an average rate (say you want to be around inflation overall) youre happy with. Its just a thought process but interesting as a concept, and of course real in effect.

[pierre]

Have you looked at how your payments are actually applied to the loan?

 

I had a mortgage with Wells Fargo (in 2008) that we were advised to set up as bi-weekly payments, to pay it off faster.

 

Turns out the money came out of my account bi-weekly, was held by Well Fargo, and once a month was applied to the loan.

 

We did not gain any advantage with bi-weekly payments, aside from "convenience" of a two small loan payments vs one big one.

 

[MochaDoc]

pierre wrote:

Have you looked at how your payments are actually applied to the loan?

 

I had a mortgage with Wells Fargo (in 2008) that we were advised to set up as bi-weekly payments, to pay it off faster.

 

Turns out the money came out of my account bi-weekly, was held by Well Fargo, and once a month was applied to the loan.

 

We did not gain any advantage with bi-weekly payments, aside from “convenience” of a two small loan payments vs one big one.

 

Click to expand...

My student loan's online, overview page shows that all payments are applied on the day of scheduled payment as well as the principal and interest distribution. Earnest is very transparent when it comes to this.

Re biweekly mortgage payments, mine is currently set up the same way. That is, I send in two biweekly payments that are applied applied once the following month. I don't know if this is standard practice in the mortgage industry. I wasn't surprised because it was plainly stated in the biweekly paperwork I filled out that this is how my biweekly payments would be applied.

One thing to keep in mind when you pay biweekly, over the course of a year you make 26 payments (2 months per year you make three biweekly payments) which equals 13 monthly payments per annum. So, in reality you make an extra monthly payment per year and do in fact decrease your repayment schedule and interest paid by some amount.