Does Paying a Student Loan Daily Lower the Payment Payoff?
When you finish school with student loan debt, the large monthly payments can be a burden for your budget. Making many small monthly payments can help you manage your cash flow, plus reduce your balance more quickly. When a lender calculates interest on a daily basis, applying payments to your account on a more-frequent basis reduces your interest charges and decreases your payoff amount.
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Interest Calculations
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Most lenders for student loans, including the federal government, calculate interest charges on a daily basis. To find out how much interest you owe, divide your annual rate, expressed as a decimal, by 365.25, multiply it by the number of days since you last paid off all the interest and multiply it by the loan balance at that time. For example, say your last payment was yesterday, it covered at least all of the accrued interest and left you with a balance of $18,259.19 at an interest rate of 6.8 percent. Calculate the interest since then with the formula: ( 0.068 / 365.25 ) x 1 x $18,259.19. Your accrued interest is $3.40.
Daily Payment Impact
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Making a daily payment of an amount greater than the interest reduces your principal balance each day. The next day's interest charge is then based on this lower principal balance. Rather than making one lump payment at the end of the month with an equal interest charge for each day, you make many smaller payments, each based on a slightly lower daily interest charge. More of each payment will get to go toward reducing your principal balance, which lowers your payoff amount faster.
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Total Monthly Payment
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If you are making daily payments, you must calculate the payment amount so your total monthly payment is at least the minimum required by your lender. Even though some months have 31 days, you might want to calculate your daily payment by dividing the monthly payment by 30 so you don't have to recalculate the payment each month. During the payment period in which February 28 falls, divide your monthly payment by 28 to calculate your needed daily payment. Always round up to the nearest penny rather than rounding down. In addition, you might want to call your lender and confirm that paying the minimum over multiple payments is acceptable.
Considerations
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Making daily payments might be more work than it is worth because each payment will generally only save you part of a cent in interest. Instead, consider making weekly or bi-weekly payments timed with your paychecks. This gives you the best of both worlds by helping you pay off the interest frequently to reduce your future interest costs and by evening out your cash flow so you make a loan payment out of each paycheck.
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