While there aren’t any shortcuts when it comes to paying back your student loans, there are viable strategies that can help you save money. In this post, we’re going to discuss one of them: a bi-weekly payment plan. By making bi-weekly payments on your student loans you can pay off them off more quickly while paying less in interest.
What exactly are bi-weekly payments?
Bi-weekly payments, as the term suggests, are payments made every two weeks. While that sounds intimidating, it’s not so bad. Under a bi-weekly plan, each payment is for only half the amount of your normal monthly payment.
To be clear, this isn’t an option that’s typically available from your lender or loan servicer. It’s a payment strategy that you execute own your own in order save on interest payments and eliminate the loan ahead of the scheduled date.
Look at it this way: If you pay $100 toward your principal today, that’s $100 that won’t be accruing interest tomorrow.
How does a bi-weekly strategy create savings?
By making a payment every two weeks, you’ll make a total of 26 payments over the course of the year. As you may have already figured out, this is the equivalent of making 13 monthly payments.
While making an extra payment will help to reduce the balance more quickly, it will also help to reduce the interest that you owe.
Look at it this way: If you pay $100 toward your principal today, that’s $100 that won’t be accruing interest tomorrow. Normally, you’re required to make a payment roughly every 30 days. In between payments, interest accrues daily on the balance of your loan. By paying half of your monthly payment a full two weeks early, you’re reducing your loan balance at an earlier date and, in turn, cutting down on the interest that accrues between payments.
However, the biggest savings will come from the extra payment - the “13th payment” that we discussed earlier - that you’ll make every year. This extra payment will help you to pay down your loan balance more quickly, thus limiting the amount that is subject to interest.
How much can I save?
To see how this might work out in the real world, let’s look at an example.
Let’s say you have a $50,000 student loan loan with a fixed interest rate of 6.5% and that the loan is amortized over a 10 year period. (If you’re unfamiliar with the term “amortization”, it simply means that your loan payments are spread out equally over a fixed period of time. In this case, they’re spread out over 10 years.)
Under a monthly plan, you would owe $568 every month for 10 years. Over the life of the loan, you would pay a total of $68,189.43, with $18,189.43 of that sum going toward interest.
When repaying the same loan on a bi-weekly basis, you would pay a total of $66,046.39 over the life of the loan, with $16,046.39 going toward interest. This represents a total savings of $2,143.04. What’s more, you would pay off the loan in 115 months instead of the 120 months it would take under the monthly plan.
Of course, the larger the beginning balance, the greater potential there is to save by adopting a strategy that helps to reduce the principal balance more quickly.
Bi-weekly payments are different than semi-monthly payments
It’s important to note that making a payment every two weeks isn’t the same thing as making a payment twice a month (semi-monthly). If you were to make two payments every month, each for half of the amount of your standard monthly payment, you’d still make only the equivalent of 12 payments every year. While you’d save a few dollars doing this, you wouldn’t save nearly as much as you would by sticking to a bi-weekly repayment plan.
Converting to a bi-weekly payment plan
If you’re comfortable paying slightly more each year, then a bi-weekly payment schedule may work for you.
To help you get started, we developed this Excel spreadsheet, which will allow you to quickly calculate potential savings and track your payments over time.