If you’re an early-career professional reading this blog, chances are you have significant student loan debt. Most professionals have some undergraduate debt floating around (median $25,000), but what really weighs in is the student loan debt from professional school. For an MBA, that adds up to an average of $42,000. A law graduate can expect to owe $84,600, and for medical school, that’s a hefty $181,179. And those figures are just for public schools! You can rack up even more debt at a private professional school.
For me, this albatross of debt is a huge psychological stressor. The misery is doubled in our case because we both have the same medical school debt. We weren’t so lucky to have “only” the average public medical school debt of over $180k – we each topped $230k by the time we were done, and we made the mistake of forbearing loans in residency and fellowship, which drastically compounded the suffering. We’ll talk about the hard lessons we learned from that experience another time. But suffice to say that when when eventually had our financial awakening, priorities # 1, 2, and 3 were to put every effort into paying off our massive debt ASAP.
That’s the trick. Simple, right? Notice I didn’t say bimonthly. The trick consists of scheduling your loan payment every two weeks, which is not exactly twice a month. If you make just two half-payments a month, you wind up with 24 half-payments per year. If you schedule it biweekly, you wind up with 26 half-payments per year. That means you make one extra full monthly payment per year, spread out across 26 half-payments. And that extra payment, because it’s above and beyond your standard monthly amount, is effectively a principal-only payment. This means you’ll save on interest and wind up paying off your loan earlier. What’s not to like?
What’s Not to Like
Well, this idea works great if you’re paid every two weeks like we are. But many people are paid monthly. This means that a person with a monthly salary who sets up this system will have two months with an extra half-payment squeezed in there. That can be difficult to budget for when the rest of your expenses tend to recur on a monthly timeline. It’s doable with careful planning, but if your loan payments are very large like ours, an extra half-payment thrown into the budget in an irregular interval could be a deal-breaker. So what can you do if you’re paid monthly? Simple – take that extra monthly payment and just spread it out over your twelve scheduled monthly payments. If your monthly loan payment is $2400, an extra payment spread out over 12 months would be an extra $200 per month. So change your automatic payment amount from $2400 to $2600 per month, and you’ve added in an extra full payment per year.
Here’s How it Worked For Us
At the time we changed our payment strategy, we had a combined medical school debt of $526,729 at 3.1% interest (we had already refinanced from 6.8%, thankfully). Our combined monthly payment amount with a 10-year term was $5,110.48. By splitting this amount in half and paying $2,555.24 every two weeks, we will wind up saving $8,393.86 in interest and paying our loans off in 109 months instead of 120 months – knocking a year off our repayment just by scheduling an extra payment per year! Since that initial change, we’ve cut some expenses in our budget and further increased our biweekly payment to pay it off even faster and save even more in interest.
How to Make it Happen
- First you need to make sure there’s no prepayment penalty for paying your loans early. This is pretty rare and doesn’t apply to most of the student loan lenders, but if you’ve refinanced with Bob’s Upstairs Bank you should check anyway (and consider refinancing if you do have a prepayment penalty, because that really makes it hard to tackle your loans).
- Check with your lender’s website to see what your schedule options are for automating payments. If there’s a biweekly – or every 14 days – option, pick that for your payment frequency. You may need to manually change the payment amount to make it half of the monthly amount.
- Check “Do not advance due date” or something equivalent. Your bank needs to know what to do with extra payment that is made beyond the minimum monthly payment (this should happen twice per year for you). The whole point of this trick is to shoehorn a couple of extra payments in and pay down more principal. If your bank just moves the due date for your next payment, you won’t get the extra payment in.
- Consider using automated transfers or set up an automated bill pay from your main bank instead. This will give you absolute control over the timing and amount. You may lose the small interest reduction (e.g. 0.25%) that student loan lenders often award for scheduling automatic drafts from the lender. In our case, this was the best option because it was the only way to set up a true bi-weekly payment (our only options with the lender were monthly or twice monthly).
Keep Track of Your Payoff Date and Check Your Progress
There are handy calculators available to see the impact of switching from monthly to biweekly payments. We put our initial payoff date (years in the future) on our calendar and watch that date get sooner and sooner with every change we make to our payments. We’re always striving to increase our monthly payment and put occasional surpluses towards our loans. Seeing our payoff date constantly adjust is rewarding.
The Bottom Line
The reason this works is that it forces you to make extra payments beyond your minimum monthly payment. There’s no magic to the schedule of every two weeks. Any increase you can make to your loan payments will have the same effect. This is just a convenient way to force yourself to make it happen – you’re still paying more per year than you would under a monthly minimum payment schedule. But that’s the point – paying more per year on your loans is how you shorten your payoff period and save money (on interest) in the long run.
What are your secrets for paying off your debt? Will you change to biweekly payments? Share your stories below.