I'm paying off a student loan right now that accrues interest on a daily basis. Last month, for example, I got a bill where the principal was $25k and the interest was $150.

I pay about $500 each month, so when my payment is applied, the first $150 goes to interest and the other $350 knocks out some of the principal.

But it occurs to me that, since the interest accrues daily, I could make one payment of $125 every week. That payment would wipe out the interest I've accrued over that week and then reduce my principal a bit for next week's interest rate calculations. Since I'm steadily reducing the principal each week instead of letting my interest build up over a month, I might be able to save some money.

Do I end up saving on interest by doing this? Does it even work?

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    Do you happen to know if they are calculating the interest daily, or doing an average, or going monthly? Your idea makes sense in all of those circumstances, but might be more effective with a daily? Somebody good with a spreadsheet could show me. – MrChrister Sep 11 '10 at 19:04
up vote 13 down vote accepted

The short answer is "yes", paying more towards the loan as soon as a you can will reduce the interest. There are calculators or you could work up a spreadsheet using the specialized family of functions: PMT, PPMT, IPMT.

My personal view: The amount of interest you offset in this manner is going to be fairly small (I'm going to guess less than $5 or $10 a month, but I haven't done the math). I would say what is more important is to automate your payments at a comfortable level, while making sure your other obligations are taken care of. Then add an extra payment when you save up a chunk of money to pay towards it. Make sure you never miss a payment. That means making sure you set up emergency fund to cover the payments if you lose your job or need to visit a sick family member for a while or the car breaks down or ....

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    Don't forget that in the case of a lost job, payments can be deferred. This is accomplished through a simple online form. Interest does accumulate on non-deferred loans, however. – kajaco Sep 11 '10 at 16:50
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    Thanks. I wrote a program to do the math for me and I would save about $20 a month. That's definitely worth the hassle of firing off an online bill payment every Friday :) – bill Sep 11 '10 at 22:41
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    @bill: You're welcome! And I just thought of this: you are actually best off paying the money you budget to the loan as soon as you have it. If you are paid every two weeks, make your automated bill pays happen every two weeks on payday! – yhw42 Sep 12 '10 at 3:48
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    Bill - sorry, you wrote you'd save $20/mo by doing this. If the rate were 12%, interest on that $500 would be $5 per month. So paying an entire payment a full month early would only save $5. How did you calculate the $20? This doesn't seem right. – JoeTaxpayer Jan 3 '13 at 1:58

(Probably too late to help the OP, sorry!)

The answer is no, if your student loan interest doesn't compound (e.g. federal loan), unless you get paid every week. Waiting a week to pay half of what you can pay will just add a little bit of interest paid during that first week.

yhw42 has it right:

...you are actually best off paying the money you budget to the loan as soon as you have it. If you are paid every two weeks, make your automated bill pays happen every two weeks on payday!

If your interest does compound, it gets more complicated.

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