How to save over $3,500 in student loan interest

Many people don’t realize you can pay extra on your student loans above and beyond your normal monthly payment.  Even fewer realize what a significant different it can make.

Let’s look at an example.
So a borrower has loan debt of $25,0000 all at 6.8% (for easiness sake).  So the borrowers daily interest (interest rate*balance/365) is $4.66.

We are going to assume the borrower makes a payment every 30 days.  The payment amount is approximately $288.00 a month.  Now lets see what 3 months of payments does to the daily interest and principal balance

Original Balance: $25,000 Payment: $288.00  Original Daily Interest $4.66

Month Monthly Interest (every 30 days) Amount Towards Principal New Balance after payment New Daily Interest After Payment
1 $139.80 $148.20 $24,851.80 $4.63
2 $138.90 $149.10 $24,702.70 $4.60
3 $138.00 $150.00 $24,552.70 $4.57

As you can see after making the regular monthly payment for 3 months the borrower will reduce the daily interest by approximately $0.09 a day and the principal balance by $447.30.

Now lets see what happens if you pay $400.00 dollars a month instead of the regular payment of $288.00 (increase of just over $100.00 more a month)

Original Balance $25,000   Payment Amount $400.00  Original Daily Interest $4.66

Month Monthly Interest (every 30 days) Amount Towards Principal New Balance after payment New Daily Interest After Payment
1 $139.80 $260.20 $24,739.80 $4.61
2 $138.30 $261.70 $24,478.10 4.56
3 $136.80 $263.20 $24,214.90 $4.51

By adding $112.00 a month to your payment you reduce your principal balance from $24,552.70 to $24, 214.90 and your daily interest from $4.57 at the end of 3 payments to $4.51.00.  This $.06 a day will save you $1.80 a month.

What this means is that not only will your principal drop $112.00 dollars a month faster because that is how much more you are paying but it will actually gain the amount of daily interest you save during the time as well.  So after 3 months you are paying off an extra almost $114.00 a month and as the balance decreases the greater these savings will become.  This will expedite your payoff to approximate 78 months from $120.00 and save you over $3,500 in interest*

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*Note: I rounded up the original payment to the nearest dollar of $288.00.  This will scew the numbers and the savings slightly.  But of course these are all only approximates.