How to Pay Off Student Loans As Quickly As Possible, The Snowball or the Interest Rate Method?
I often see people in my general age range that are absolutely buried in student loans, and not only do they not seem to understand or have a concept of how bad this is, but also are they completely unaware of how to pay these off. There are two general methods to paying off any type of debt the quickest, the debt Snowball and the Interest rate method. However with student loans, I would have to say I prefer the interest rate method, and I’ll explain why in this blog post. For more details and information on all things business and finance, read on or subscribe to our blog for additional details and information.
What is the Debt Snowball Method?
There is a strong behavioral argument that you should snowball your student loans. The statistics on this show that the majority of people who do get out of debt use this method, as much of the problem regarding paying down debt is a problem of psychology, as much as it is a mathematical finance problem. The debt snowball refers to paying down the lowest debt amounts possible, and letting that essentially “take off” loans one by one. This way it feels like you are making additional progress, your brain releases dopamine, and you get more and more motivation to continue paying down debt. Let’s look at how I would pay down the following loans:
Truck loan: $7,000 11% Interest
Student loan 1; $40,000 5% Interest Rate
Student loan 2: $800 7% interest Rate
Loan 3: $5,000 4% Interest Rate
Loan 4: $1700 6% Interest Rate
Loan 5: $1875 14% Interest Rate
Loan 6: $17,000 0% Interest for the next 3 months, then 2% Interest per year
Loan 7: $4400 4% Interest
Loan 8: $1100 1% Annual Interest
For a total of just under $80,000 in total debt. With the debt snowball, we can essentially ignore the interest rates (which is not always the best strategy) and start crushing each of these loans one by one, smallest to largest. If I were snowballing, and I would probably use a combination approach personally towards paying down these loans, I would do take these out in the following:
While obviously making the necessary payments on these as they come up on all of the loans so you don’t eat additional fees and penalties. There are a few advantages to this, and I think even with the interest rate method being what it is, I would prefer the snowball method:
- You have the behavioral method of crushing each loan one by one (less loans = less debt, and you are much more likely to pay it off using this method.)
- One less loan means one less monthly payment on each of these loans. While yes, mathematically speaking I should pay down the $17,000 loan before the $1100 loan with just a 1% interest rate going against me, it may be more advantageous, depending on what current financial situation I am in, to pay down the smaller loan first. Not only will I get the dopamine boost of having taken out one of the loans, which will be more motivation to work overtime, make more money at my job, and the like, but also will I have one less payment to make each month. This amount of loans can absolutely crush you with payments if you don’t keep on top of it, and so by taking out each of these one by one, you give yourself a huge advantage in that you are making less payments on less loans.
Those are the awesome advantages of using the debt snowball method, lets take a look at the Interest Rate Paydown method.
What Is The Interest Rate Method? The Mathematically Faster Way to Pay Down Debt
Now the other method you can use to pay down debt, and I would use this in conjunction with the Debt Snowball method differently for different clients, in which you pay off the highest interest rate debt the highest, Mathematically, this is the best way to save money on interest, and thereby pay down your debt the fastest. Consider the following:
$12,000 in debt at 17% interest
$5,000 in debt at 0% interest
$1400 at 0% Interest
$100,000 at 1% interest
$1400 in Debt at 28% Interest
$25,000 at 19% Interest
All else aside, in terms of pure mathematics, you would be wise to pay down the $1400 loan first, followed by the $25,000 loan, and the $12,000 loan after that. You are eating less interest this way, which you can use to pay down the other loans, its a win win. Behaviorally however, it is somewhat more difficult to do this, because a $12,000 loan going down to $9,000 isn’t necessarily as much of a psychological win as paying down the $1400 loan super quickly.
How to Pay Off Student Loans As Quickly As Possible, Which Method is Best To Use?
And that’s the gist of my method for paying down student loan debt as quickly as possible. For more details and information on all things business and finance, be sure to comment down below or read on for additional details and information.
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