This post comes from Debt Less Grad, a resource offering help and advice to recent grads with student debt.
Did you know that when you pay your monthly student loan bill, banks often distribute your payment equally across all of your loans, regardless of interest rate or total loan amount?
The Repayment Pyramid can help you quickly see repayment progress and free up cash that can be applied to larger loans.
The “Repayment Pyramid” (or debt snowball as referred to by other financial experts) is a repayment strategy that consists of paying off your student loans in order of the size of the loan, starting with the smallest student loans and paying off the largest student loans last.
Once you pay off a smaller loan, you will free up cash that you can put towards paying off your larger student loans.
For example, imagine you have a $10K loan that has $100 monthly payments and a $40K loan that has $400 monthly payments. Instead of paying down the largest loan first, you can pay off the $10K loan first, and when it’s gone, you have an additional $100/mo. from the paid off student loan that you can contribute to the larger student loan repayment.
There is also a big psychological benefit of paying off your smallest loans first. By paying down the smallest loan, you will quickly see progress. The mental benefit of seeing the fruit of your labor can help you to stay motivated through the rest of your journey.
Nevertheless, you also need to make smart repayment decisions based on interest rates. If you have a loan for $10K at 6% interest, and another loan for $10K at 8% interest, you will save more money if you pay off the higher interest rate student loan first. Keep in mind, the best way to repay student loans might be to pay off higher interest rate student loans first, even if they are larger principal loans.
Of course – accelerating student loan repayment becomes easier when you are making enough income to throw at the loan so that you are paying more than the minimum. Find out more about paying off student loans with Debt Less Grad!
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