How to Pay Off Student Loans: Snowball Method or Avalanche Method?

By
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November 30, 2016

If you've ever searched the web for "how to pay off student loans," you've probably come across hundreds of articles that all advocate for different payoff methods. But student loans, like all other aspects of personal finance, are just that personal.

That's why there's no right answer to this question. We recently interviewed two CommonBond members, each of whom is using a different strategy to pay off their student loans and achieve their personal financial goals: the snowball method and the avalanche method. Read on to learn what these methods are, why our members chose them, and the pros and cons of each.

Snowball Method

CommonBond member: Britt Martinez

Job: Behavior Specialist

Degree: Master's Degree in Psychology and Applied Behavior Analysis

University: Capella University

Debt: $80,000

After graduating from her Master's program, Britt was facing $80,000 in high interest student loans with no end in sight.

"I was upset and bitter about my education because of its high cost, and it left me feeling like we didn't have a strategy to achieve our financial goals. My fiancé and I would love to buy a house, but with so much student loan debt, we thought we could never do it," Britt said.

Britt's not alone: A recent survey by CommonBond measured the impact of student debt on millennials and found that 69% are delaying buying a home because of their student debt.

Instead of feeling stuck, Britt took action and refinanced her student loans opting for lower monthly payments and a 20-year term. Refinancing simply means taking out a new loan to replace an existing loan; the new loan you take out often comes at a lower interest rate, with lower monthly payments, or both. Refinancing allowed Britt to free up income each month to save for a down payment for a home and contribute to a college fund for her newborn son, while focusing on paying off her smaller student loans first.

(Want to learn more about student loan refinancing?  Download CommonBond's Refinancing 101 Guide.)

"My parents told me to start small with paying off our debts. Take the smallest loan, whether it's a student loan or a car bill or a credit card bill and pay it off. Then work to the next one," she said.

Britt's parents were advocating for the snowball method, which means that you pay off your debts in order of smallest to largest, regardless of interest rate. For example, let's say that you have three major debt balances: $17,000 with a 3.2% APR, $4,500 with a 5% APR, and $48,000 with a 6.7% APR. Using the snowball method means that you would allocate the most money to paying off your $4,500 debt while making minimum payments on your $17,000 and $48,000 debts.

This method keeps you engaged because you can pay off your smaller student loans quickly while making meaningful contributions to your other financial goals along the way, like a college or retirement fund.

However, using the snowball method also means that it may take longer to get out of debt, and you'll pay more interest over time. But if your financial goals require years of saving and could benefit from compound interest growing in your accounts, using the the snowball method to pay off student loans may make more sense for you.

Avalanche Method

CommonBond member: Maggie Worsley

Job: Physical Therapist

Degree: Doctorate of Physical Therapy

University: Armstrong Atlantic State University

Debt: $86,000

Being debt free by 2020 is Maggie's single most important financial goal.

"I put any extra income towards paying off my student loans, which are my highest interest debt, and pay a set amount above the minimum. My new personal minimum payment amount is about 65% higher than the minimum set by Commonbond for me," Maggie said. Maggie took this approach because it enables her to pay off her student loans as quickly as possible.

While she's still contributing to a safety net in case of job loss or financial hardship, all of her additional income is going towards tackling her highest interest debt.

Maggie is taking advantage of the avalanche method, which means aggressively paying off your debts, beginning with the highest interest loan.

"It's been important to me not to get caught up paying off small debts to feel better about my progress. Really tackling the higher interest rate debt has allowed my money to do the most work for me and save me the most interest," Maggie said.

Let's revisit the last example, where you have $17,000 in debt with a 5% APR, $4,500 with a 6.2% APR, and $48,000 with a 12.7% APR. Using the avalanche method, you'll pay down your $48,000 loan and then your $4,500 loan.

The avalanche method does have its disadvantages. It may take longer for you to feel like you're making real progress towards paying off your student loans with this method, especially if your highest interest loan is the largest. It may also hurt your ability to meet other financial goals, like contributing to a retirement fund.

However, this method allows you to get out debt faster than the snowball method by tackling your high interest rate loans first. You’ll pay less on interest in the long run, especially when you pay more than your minimum monthly payment.

Even though Maggie's student loan repayment strategy is focused on paying as much as possible as quickly as possible, she's still making plans for her debt-free future. Once Maggie has paid off her student loans, she plans to redirect the money she used to allocate to her student loan payments to max-out tax-advantaged retirement and stock options offered by her employer.

Which method should you use?

There are no absolutes when it comes to paying off your student loans, and many people often use a combination of the two methods over the course of their repayment. Depending on your personal situation, you could save time and money in the long-term by using the avalanche method. However, if your goals are more oriented towards saving now, and you're motivated by wins along the way, the snowball method could make more sense for you.

Before you decide how to pay off your student loans:

Track down the resources you need to make smart financial decisions. Write out your short and long term financial goals. Decide if they require you to save a significant amount each month, or if you can wait to start saving until after you've paid off your student loans. Calculate your monthly expenses and decide how much you can allocate to paying off your student loans.Use student loan calculators to test different repayment plans and help determine which methodology will work best based on your financial goals.

Remember, there's no right or wrong way to pay off your student loans. Making consistent, on-time payments, and orienting your strategy towards your financial goals will get you on the path to financial freedom in no time.

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