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.
Check out our Student Loan Hero Student Loan Refinancing Calculator below to see what refinancing to a lower rate could do for you.
Student Loan Refinancing Calculator
Interested in refinancing student loans?Here are the top 6 lenders of 2019!
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.50% APR (with Auto Pay) to 7.82% APR (with Auto Pay). Variable rate loan rates range from 2.43% APR (with Auto Pay) to 7.21% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 17, 2019, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/17/2019. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on our student loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the fixed rate will decrease by 0.25%, and will increase back up to the regular fixed interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.45% effective May 10, 2019.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.43% – 7.21%1||Undergrad & Graduate|
|2.43% – 6.65%2||Undergrad & Graduate|
|2.43% – 6.59%3||Undergrad & Graduate|
|2.44% – 6.87%4||Undergrad & Graduate|
|2.46% – 7.08%5||Undergrad & Graduate|
|2.93% – 9.67%6||Undergrad & Graduate|