We all know there are different strategies people can use to pay off debt. I just wish I knew that when I was just out of college and dealing with student loans and credit card debt.
Ironically, I didn’t learn this from my job as a personal banker, though. I did, however, learn it when I started working in fintech (financial technology). And I’m not lying when I say how life-changing some of these debt payoff methods can be.
What’s more, if you’re dealing with student loan debt, targeting your payoff with one of these methods can be a game-changer for you. Here are some of the top methods to keep in mind, and why one of the most popular – the debt avalanche method – might work best for you.
What is the debt avalanche method?
In general, there are two major debt payoff methods: the debt avalanche method and the debt snowball method. Both are used to target one debt at a time while you pay the minimum on all others. But that’s the end of their similarities.
The debt snowball method targets the lowest balance debt first. The idea behind this is that you’ll get a rush from the quick win of paying off your smallest debt. That’s momentum you can carry through the rest of the process.
However, with the debt avalanche method, the idea is to focus on the debt with the highest interest rate first. You don’t get the same small wins you would with paying off small debts faster, but you are paying off the most expensive debt first.
Then, once your first targeted account is paid off, roll the payment amount you were making to your next target account. That’s in addition to the minimum payment for that new account.
After the second account is paid off, if you have a third, then you apply the payments from the first and second accounts to the third one. Again, this is in addition to the third account’s minimum payment.
You can pay your debt off faster by rolling over your payments from paid off accounts to your remaining accounts. This is much more effective than simply paying less on your overall debt per month as your accounts are getting paid off.
How can you use it to pay off student loan debt?
If you’re facing credit card and student loan debt, then the debt avalanche method is great for paying off both. After all, credit cards come with double digit interest rates, while student loans typically do not.
If you have only one student loan, then this method does not apply to you. But if you have multiple loans with varying interest rates, then you can use this method.
Even if all of your student loans are with one servicer, make sure log into your account to see the breakdown. You might find that your interest rates on multiple loans can vary with the same servicer.
This also helps you out the most if you have private student loans. Private student loans aren’t just more expensive than federal (typically). They also don’t come with the same protections you would have with federal loans. (Think things like forgiveness, forbearance, and deferment).
Because private loans don’t have as many protections for you, they could be considered riskier. Therefore, if you use that logic with the debt avalanche method, you could target your private student loans as the riskiest debt first.
Is the debt avalanche method the best for you?
The answer to this question is going to depend on what you’re looking for.
Do you need more motivation to pay your student loans off? If so, then you might want to try the debt snowball method. Kaya Ladejobi, a certified financial planner, weighs in on the positive effects she’s seen with the debt snowball method.
“I generally favor the debt snowball method over the debt avalanche method,” says Ladejobi. “There is the psychological boost that one can get from crossing a loan off the list no matter how small the balance was.”
“When it comes to tackling debt, momentum always feels good,” Ladejobi adds. “The debt avalanche method can be a little slow to offer that.”
Ladejobi also recommends the debt snowball method to her clients if they’re thinking of a quick boost to their credit scores to finance a large purchase.
“If a client pays off the loans with small balances first, they can easily see improvement in their debt-to-income ratio,” explains Ladejobi. “So if a person is trying to apply for a mortgage or car loan in the near future, I like to advocate that they pay off small balances first.”
Therefore, if your absolute top priority is to pay your debt off the fastest, then the debt avalanche method might be the way to go for you. Unless your loans have practically identical interest rates.
Get started on the debt avalanche method today
You can use this debt avalanche calculator to see what this method can do for you. It also has an option for you to compare it with the debt snowball. That way you can see if one or the other makes a bigger impact on your repayment time.
And don’t forget, tackling the highest interest rate debt first isn’t the only way to speed up your debt payoff. You can also try lowering your interest rates to ensure that more of your money goes straight to that principal balance.
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