Snowball v. Avalanche

Two Methods to Effectively Pay Your Student Loans

We’re glad to have you back! By now, you know where to get a student loan that will fit with your career and budget. You also learned easy ways to make extra income to help your finances. So today, we’re wrapping our series on student loans. It’s time to finally talk about payments and strategies.

With summer around the corner, it’s a great time to talk about snow. Yes, you read the right. Well, not snow exactly, but we will talk about some things we associate with snow: snowballs and avalanches. But no, we’re not going to explain how to create the perfect snowball to throw at your best friend. Today, we are going to discuss the two ways you can tackle paying down your student loans debt: the snowball and avalanche effect. Both are great methods to help you get rid of your student loan debt. We told you: this doesn’t have to be a mortgage on your future and education and will stick to this promise. Let’s get to it!

The Snowball Method

The snowball method is a strategy that will help you reduce your debt easier, faster, and most importantly, in an effective way. Of course, it’s not magic and you still need to plan it carefully. When done consistently, the snowball method is an effective way to pay down your debt.

To accomplish this, list how much you owe from smallest to largest. (Bonus: this works for paying off credit cards and other types of loans as well!) Same as a snowball falling down a hill, it starts small and it becomes bigger and faster as it moves downwards. But how does this apply to your debts? Easy. You will start paying the smallest amount first, and once it’s paid, you will pay off the next one on the list by applying the payments from the smaller amount to the larger. Sounds good, right?

And not only does it sound good, but this method also goes beyond math and numbers. The method is more about a shift in your mindset and behavior modification. Why? Because there’s nothing more satisfying than seeing your debt get eliminated, no matter how small it is. It’s effective because you will see the progress. Keep in mind that you will still pay all of your bills, but you will eliminate them one by one, by “rolling” the smaller amounts into the larger ones. By the time you get to the larger bills, all the money that used to go to smaller loans will be available to go into the bigger one. For example, in this case, the side hustle money we learned about last week would come in very handy.

The Avalanche Method

With the avalanche method, you pay your debt from the highest to lowest interest rate. Did you read that? You will pay your debt based on the interest rates. And if you think about this for a moment, it does make more sense, right? This means that you will be saving a lot of money in interest. Now, this method is going to need a little more discipline and planning, since it’s more of a long term strategy. Since you’ll be attacking loans with higher interest rates, it might take a little longer to see “results”, a/k/a. less debt in your balance. But in the long term, you will be saving on interest rates. Money will eventually go to the loan with the next highest interest rate and finally, clear your balance from the smaller debts. Sometimes, thinking of the interest getting higher and accumulating can be stressful, and this method is ideal to get rid of this preoccupation. If you’re more of a mathematical person, this method would suit you the best.

Via Community Resource Credit Union

Now, which one is better? There’s not really a “better” method. The best option for you will depend on you and your financial obligations. And, it will depend on your mindset. You will have to decide which method will be more suitable for you, whether you need to see results right away, or if you feel you have more patience and you’re willing to wait a little longer for results.

Whatever method you choose, it’s always a good idea to think about the interest rates on your student loans. A good way to do this is to make the interest rates more real by painting an actual picture of what lies ahead so you understand the financial burden and responsibility you bear. The daily accrued interest method is a good way to help you create your scenarios. Let’s take this example, imagine you sign on a $10,000 Direct Unsubsidized Loan with a 6.8% interest rate, the amount of interest that accrues per day is $1.86. Assuming you are repaying your loan under the Standard Repayment Plan, just by this, you have an extra $680 annually. Now, we know on average, students take out about $40,000 over the course of their college career. For this amount of money at 6.8% interest, that’s $2720 annually, and it grows at $7 daily. That will keep on adding to your balance and grow to closer to $8 the next year, and maybe $9–10 the next. Seeing the interest and payments as something that goes on every day and not just as payments that you have to take care of in the future, will give you a completely different perspective on the importance of interest rates and payments.

By now, you should have all the tools to make a wise decision. As we said the first day, we can’t really put a price on education but this doesn’t have to be a mortgage on your future. Taking a student loan will be one of the first big decisions you will make as an adult. Know that you’re not alone in making this decision. Definitely talk to your family and friends, especially folks that have graduated and that are paying off (or have paid) student loans. We also hope that the information we have provided here is helpful and that you can refer back to them in the future.

This is something that we don’t often talk about or even read about when we investigate student loans. But we’ve all been through this, or you might be going through this process right now. And as you saw, there’s a lot of information and new things to learn and it can all be very confusing. Especially at first, when there’s so many new things to think about, such as classes, college life, and your future. All of this, at such a young age, can be very scary. Talking to your loved ones and asking for help if and when you need it is very important.

Of course, this is no reason to freak out and rethink taking out a loan. Keep in mind, this is going to be one of the biggest investments of your life and it’s about your future as a professional adult. But having the right information and support will make this process smoother. We encourage you to do your research and ask questions BEFORE you sign your promissory note — make a decision that makes sense for you!

Thank you for reading our series on student loans! We know there’s a lot of information out there and it might take a while to sink in, but our aim is to make this process easier and closer to reality, beyond just number and statistics. The right decision at the right moment can make a world of a difference about your finances in the future. We hope you find out guidelines and information useful. And remember, any big investment carries big risk, but also big profits, that you will see for the rest of your life. Cheers!