Some experts argue that the next financial bubble will be from Student Loan Debt. In 2011, the Fiscal Times reported the student debt bubble at $2.3T.[1] Many people have a disproportionate amount of debt compared to their potential income. “Going to college” has become a socio-political nightmare for political, private and ideological reasons. The military has its Tuition Assistance programs and the Montgomery GI Bill/Post 9-11 GI Bill, but our dependents, family members and friends may still struggle with their student loans.
Paying down your student loans can be confusing, but here’s my recommendation on how to pay them down quicker using the “Snowball” effect. First you must identify what type of loans you have, then pay down the interest bearing loans by lowest balance first and lastly finish paying off the non-interest bearing accounts.
Identify the types of loans you have: There are many types of loans given to college students. Some are subsidized by the government with adjustable or fixed rates and some are issued by the state or privately by the college. The first step is to identify which loans are interest-bearing and which ones have adjustable interest rates. Some loans, for those in the medical and legal fields, are adjustable by the amount of income you make. If this is the case, then you can find ways to lower your adjustable gross income like maxing out a Traditional IRA (vs. a ROTH IRA). Read more about the difference between a Traditional IRA vs. a ROTH IRA here: Traditional vs. ROTH
Pay them off in order of smallest to biggest balance: Start with your smallest balance interest bearing loans and put any extra in your budget towards that loan and then pay the minimum payment on all other loans. As each interest bearing loan balance is paid off, you “roll” that extra payment into the next interest bearing loan with the next smallest balance. This creates a “Snowball” effect as each paid off loan’s minimum payment gets lumped with the next minimum payment and the debt will be paid off faster.
Non-interest bearing loans last: If you have non-interest bearing loans, then keep those to the last. Pay the absolute minimum payment or defer them if possible until last or until you have a job to make the minimum payments. Don’t feel rushed to pay these off because “investing” your money anywhere else would yield you a better return.
My wife attended the University of Phoenix and received a Health Care Administration Bachelor’s degree. The loans totaled to almost $40K. She spent the next seven years raising our two kids. Now that both of them are school aged, she started paying them off using this technique. She was able to eliminate all the interest-bearing loans and then deferred/forbore the rest until she just recently got a job as a heath care administer and thus inspired me to write this blog post.
