When you’re looking for answers on how to pay off your student loans, you’re likely to come across two different repayment strategies: the debt snowball and the debt avalanche.
What does all this ice have to do with paying off debt? Let’s take a look at the debt snowball and debt avalanche methods of eliminating student loans so you can figure out which one works best for you.
The Debt Snowball
The debt snowball method aims to start with small wins and build momentum over time. Using the debt snowball method, you start paying off your student loans according to the smallest balance first, while paying the minimum on the rest.
Let’s say you have three student loans with balances of $15,632, $1,685 and $8,941. Using the snowball method you would:
- Focus on paying off the $1,685 balance first, throwing as much money as possible toward this loan.
- Pay the minimum on your $8,941 loan.
- Pay the minimum on your $15,632 loan.
It’s important to stay in good standing with all of your loans, but the goal is to prioritize the smallest balance and then work up to the higher balances. In this case, after paying off the $1,685 loan, you’d then focus on the $8,941 and then the $15,632 loan.
This method of paying off debt is a popular choice in the personal finance community because it helps borrowers see results right away and get a boost of motivation. In fact, financial guru Dave Ramsey swears by this method.
The major downside to this strategy is that it often takes longer to eliminate all your debt using this method versus the avalanche.
Here’s a closer look at the pros and cons of the debt snowball method:
- Starting with the smallest payments first can provide quick wins and a sense of accomplishment.
- It’s a tried and true method to pay off debt.
- As you eliminate your smaller balances, you can free up extra funds to focus on the next balance.
- It may take longer to pay off your debt.
- You could pay more in interest in over time.
The debt snowball method is a good choice if you’re dealing with some hardcore debt fatigue and need a boost of motivation. If you go this route, know that you’ll probably pay more in interest since you’re focusing on the smallest balance first, rather than the interest rate.
The Debt Avalanche
The debt avalanche method differs from the debt snowball method because rather than focusing on the smallest balance, it focuses on the highest interest rate.
Imagine an avalanche, which starts at the highest peak and cascades downward. Similarly, the debt avalanche method requires you pay down the highest interest rate loan first while paying the minimum balance on the rest of your loans.
So if you have loans at 7.9%, 6.8% and 4.5%, you would work on eliminating your 7.9% interest rate loan first first, regardless of the balance. Once you’ve paid it off, you’ll then focus on the 6.8% loan, then the 4.5% loan.
I employed the debt avalanche method to pay off my student loans. For me, given my interest rates and student loans balances, it just made sense.
Here are the pros and cons of using the debt avalanche method.
- You save money on interest (win)!
- You’ll pay off your loans faster.
- It can be hard to sustain motivation.
- It may feel like it takes forever to pay off the high-interest debt.
Debt snowball or debt avalanche: which one is best?
Both the debt snowball and debt avalanche methods will get you to the same destination — a debt-free life.
Choosing the right strategy for you really depends on your goals and how you’re motivated. Do quick wins spur you to action or does the thought of saving money on interest keep you going?
Knowing exactly how much you could save can influence your answer. You can use an online calculator that compares the debt snowball and debt avalanche methods to determine how long it will take to get out of debt and see how much interest you will pay over time.
Depending on your interest rates and balances, you could stand to save thousands of dollars and shave off time from your repayment period by using the debt avalanche method.
But if you have a hard time paying off debt or won’t save a significant chunk of dough, the debt snowball may be a good option for you.
Also, you don’t have to choose between one or the other – sometimes a combination of the snowball and avalanche is most effective.
In other words, there are no right or wrong answers when it comes to debt repayment. Whether you choose the debt snowball, debt avalanche, or some hybrid method or something completely unique, the key is that you’re consistent and that you have a plan to get out of debt.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
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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 3.89% APR (with Auto Pay) to 6.97% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.23% 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 Month/Day/Year, 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 08/21/18. 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 ourstudent loan refinance product.
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2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
Savings example: average savings calculated based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were disclosed. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
Application detail: 5 minutes indicates typical time it takes to complete application with applicant information readily available. It does not include time taken to provide underwriting decision or funding of the loan.
Instant rates mean a delivery of personalized rates for those individuals who provide sufficient information to return a rate. For instant rates a soft credit pull will be conducted, which will not affect your credit score. To proceed with an application, a hard credit pull will be required, which may affect your credit score.
Total savings calculated by aggregating individual average savings across total borrower population from 9/2013 to 12/2017. Individual average savings calculation based on single loans refinanced from 9/2013 to 12/2017 where borrowers’ previous rates were provided. Assumes same loan terms for previous and refinanced loans, and payments made to maturity with no prepayments. Actual savings for individual loans vary based on loan balance, interest rates, and other factors.
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.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate||Visit SoFi|
|2.47% – 6.23%1||Undergrad & Graduate||Visit Earnest|
|2.47% – 8.03%4||Undergrad & Graduate||Visit Lendkey|
|2.95% – 6.37%2||Undergrad & Graduate||Visit Laurel Road|
|2.48% – 6.25%5||Undergrad & Graduate||Visit CommonBond|
|2.72% – 8.32%6||Undergrad & Graduate||Visit Citizens|