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Debt Snowball Method

May 18, 2018

When you took out loans for your education, you were likely laser-focused, hurdling goal after goal to finish the race as quickly as possible and get that diploma. You may have even used that vigorous momentum to land your first job out of school. When the vicious cycle of bills begins to eat away at your paycheck, you may feel like your financial life is freezing in time. Now buried in student loan debt, all you can move is your eyes, and all you can see is an avalanche of credit card debt, car payments, and maybe even a mortgage, coming straight for you.

 

Debt Snowball Method

While researching the quickest way to dig yourself out, you may have heard of the ‘debt snowball method’ as prescribed by financial expert Dave Ramsey. While other methods advise tackling your biggest debts with the highest interest rates first, the debt snowball method is that you pay down your smallest debt first and use that momentum to carry into the next.

 

The makings of a perfect snowball

 

As eager as you may be to start chipping away at even your smallest debt, it should be noted that having a rigorous monthly budget with a comfortable emergency fund is the cornerstone of Ramsey’s entire philosophy. Without them, the smallest bump in the road to repayment can cause serious setbacks.

 

After you assign every dollar in your budget and gather an emergency fund buffer around your finances, list your debts from smallest to largest. Don’t pay any mind to interest rates or due dates; the only figure that’s important right now is the total loan balance on each account.

Staging a successful siege

 

Next, to avoid racking up more debt, make minimum payments on all your debts except the smallest. Then use every spare dollar in your budget to pay as much as possible on your smallest debt. The more you can pay at the beginning, the bigger your snowball will become. The psychological victory from having a few quick wins will boost your confidence and help you gain momentum.

 

By the time you start making payments on the bigger debts, you have much more cash freed up from the absence of your smaller debts. At this point, the momentum you have will encourage you to stick with the changes in your financial behavior. Those changes have the power to get you out of debt and keep you from falling back into it.

 

Even though it may cost more money than paying off your highest interest rate debts first, the snowball method allows you to make short (but immediate) strides towards a debt-free life. As tempting as it may be to kick down the door and come in guns blazing, you can really set yourself up for a much more successful siege with a little bit of planning and a whole lot of discipline.

 

Refinancing your snowball

 

Another great way to position yourself for success is to look into refinancing your student loan debt. Like the debt snowball method, the proper planning and smarter borrowing associated with refinancing enables you to proceed through the repayment process in the most efficient manner. Student loan interest rates are nearing all-time lows, and consolidating your multiple student loans into a single loan with a fixed rate secures the notion that you’ve done everything you can do to simplify that particular part of your finances.

 

Our customers have reported that they are saving an average of $309 every month and should see an average of $20,936 in total savings after refinancing their student loans with Education Loan Finance.* Consider the impact refinancing could have just by applying those savings to your other forms of debt. With proper planning and smarter borrowing, you can avert the threat of avalanche and most efficiently summit the mountain range of your financial goals.

 

See Our Simplest Guide to Student Loan Refinancing Part 1

 

* Average savings calculations are based on information provided by SouthEast Bank/ Education Loan Finance customers who refinanced their student loans between 8/16/2016 and 10/25/2018. While these amounts represent reported average amounts saved, actual amounts saved will vary depending upon a number of factors.

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2019-12-11
Holiday Budgeting: Gift Ideas That Last Into the New Year

Unless you’re one of those people who had their holiday shopping done by December 1, you’re like the rest of us who spend 25 days scrambling around, balancing holiday parties, school finals, baking cookies, traveling, and shopping for gifts. Gift-giving is one of most festive-feeling and most stressful of holiday traditions. It’s also likely what brought you to this blog. As a recent college graduate, with an entry-level paycheck and mountain of student loan debt, it’s difficult to gift well without destroying your monthly budget. Check out our list of possible presents that are money-conscious and aren’t likely to get returned (or thrown out with the wrapping paper).

 

Give Experiences

It’s no secret the U.S. is a country of “stuff.” We fill our homes, garages, and eventually, storage units with items that we just know we’ll use again someday. While the newest iPhone® or New York Times® Bestseller might make your family and friend’s faces light up this December, once the next model comes out or the last page is read, those gifts become obsolete. 

 

 So instead of blowing your hard-earned income and monthly budget on more “stuff,” consider giving experiences: concert tickets, zoo memberships, or woodworking classes that your recipient will remember longer than they will the plot of that over-rated biopic. What’s even better: you can experience these things together. If you’re looking for more experiences to gift this holiday season, check out Huffington Post’s article, 21 Gift Ideas For People Who Value Experiences More Than Things. You can find a more holistic approach to experiential gift-giving for the mind, body, and soul in this ELFI blog.

 

Give Savings 

While not the most glamorous gift, receiving a contribution towards your student loan debt really is the gift that keeps on giving. Helping put a dent in student loan debt is more thoughtful than cash or a gift card snagged while checking out at the grocery store, and it can help you pay off those student loans faster. 

 

If your parents, grandparents or significant other made a student loan payment in your honor for the next two-three years for the holidays and your birthday, thousands of dollars could be shaved off of your student loans. Getting out from under student loan debt faster also means more fun money in your checking account to boost that monthly budget and buy the gifts you really want to give. 

 

If you’re like the many students who took out multiple federal and private student loans over the course of college, it may be a good time to consolidate and refinance student loans into one singular loan. Besides possibly scoring a better repayment term and interest rate, seeing the family contributions to paying off the debt could really jumpstart your 2020 goal of getting more financially fit. 

 

REgive Gifts

Re-gifting gets a bad wrap for being the lazy person’s way of shedding the unwanted junk in their house. However, with a little extra thought, re-gifting can be a fulfilling experience. Look past the junky toaster on your kitchen counter or clothes you hate and consider items that are in good condition, but no longer bring you joy or serve a purpose in your home. Maybe it’s an old CD that you and your dad listened to before you left for college. Maybe it’s an Instant Pot® that you really thought you’d use more of in 2017. Or maybe it’s a necklace your friend always compliments. Whatever it is, clean them up, wrap them nicely, and—whatever you do—be sure your friend or family member didn’t give you the item first. The secret to successfully re-gifting is to be upfront and honest about the gift being from your own personal department store and share why you did it.

 

Give Time

The holiday spirit is all about being with the ones you love and being generous to those in need. If you or your family are feeling stressed to maintain monthly budgets this year, consider scrapping gifting (in the traditional sense) altogether. There are countless organizations that take volunteers throughout the holiday season to distribute presents in hospitals, cook meals for the homeless, and even shovel snow or hang Christmas lights for the elderly. By giving time, you make connections in your community, spread cheer, and build karma for the new year. 

 

If you’re still feeling stressed about ruining your perfectly planned monthly budget this holiday season, consider student loan refinancing. Recent graduates have reported saving an average of $309 every month after their student loan refinance with ELFI*, which averages out to $20,936 in total savings.¹ And because this is the busy time of year, you can see your potential savings and see if you are prequalified for a student loan refinance in minutes. Happiest of holidays to you and yours!

 
 

*Subject to credit approval. Terms and conditions apply.

 

¹Average savings calculations are based on information provided by SouthEast Bank/ Education Loan Finance customers who refinanced their student loans between 8/16/2016 and 10/25/2018. While these amounts represent reported average amounts saved, actual amounts saved will vary depending upon a number of factors.

 

Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.

2019-12-10
Student Loan Repayment: Debt Snowball vs. Debt Avalanche

By Kat Tretina

Kat Tretina is a freelance writer based in Orlando, Florida. Her work has been featured in publications like The Huffington Post, Entrepreneur, and more. She is focused on helping people pay down their debt and boost their income.

 

To cope with the high cost of college, you likely took out several different student loans. According to Saving For College, the average 2019 graduate left school with eight to 12 different student loans.

 

With so much debt and so many different individual loans, you may be overwhelmed and can’t decide where to start with your repayment. If you want to pay off your loans ahead of schedule, there are two main strategies that financial experts recommend: the debt avalanche and the debt snowball.

 

Here’s how each of these strategies work and how to decide which approach is right for you.

 

The difference between the debt snowball and debt avalanche strategies

Both the debt avalanche and debt snowball methods are strategies for paying off your debt early. However, how they work is quite different.

 

Debt avalanche

With the debt avalanche method, you list all of your student loans from the one with the highest interest rate to the one with the lowest interest rate. You continue making the minimum payments on all of your loans. However, you put any extra money you have toward the loan with the highest interest rate.

 

Under the debt avalanche, you keep making extra payments toward the debt with the highest interest rate. Once that loan is paid off, you roll over that loan’s monthly payment and pay it toward the loan with the next highest interest rate.

 

For example, let’s say you had the following loans:

  • $10,000 Private student loan at 7% interest
  • $15,000 Private student loan at 6.5% interest
  • $5,000 Direct Loan at 4.45% interest
 

In this scenario, you would make extra payments toward the private student loan at 7% interest first with the debt avalanche method. Once that loan was paid off, you’d make extra payments toward the private student loan at 6.5% interest, and then finally you’d tackle the Unsubsidized Direct Loan.

 

Debt snowball

The debt snowball method is more focused on quick wins. With this approach, you list all of your student loans according to their balance, rather than their interest rate. You continue making the minimum payments on all of them, but you put extra money toward the loan with the smallest balance first.

 

Once the smallest loan is paid off, you roll your payment toward the loan with the next lowest balance. You continue this process until all of your debt is paid off.

 

If you had the same loans as in the above example and followed the debt snowball method, you’d pay off the Direct Loan with the $5,000 balance first since it’s the smallest loan. Once that loan was paid off, you’d make extra payments toward the $10,000 private loan, and then you’d pay off the $15,000 private loan.

 

Pros and cons of the debt avalanche method

The debt avalanche strategy has several benefits and drawbacks:

 

Pros

  • You save more in interest: By tackling the highest-interest debt first, you’ll save more money in interest charges over the length of your loan. Compared to the debt snowball method, using the debt avalanche method can help you save hundreds or even thousands of dollars.
  • You’ll pay off the loans faster: Because you’re addressing the highest-interest debt first, there’s less time for interest to accrue on the loan. With less interest building, you can pay off your loans much earlier.
 

Cons

  • You don’t see results as quickly: Because you’re tackling the debt with the highest interest rate rather than the smallest balance, it can take longer before you can pay off a loan.
  • You may lose focus: It takes longer to pay off each loan, so it’s easier to lose motivation.
 

Pros and cons of the debt snowball method

The debt snowball method has the following pros and cons:

 

Pros

  • You get results quickly: Since you’re targeting the loan with the lowest balance first, you’ll pay off individual loans quicker than you would with the debt avalanche method.
  • Frees up money to pay down the next loan: You’ll be able to pay off loans quickly and roll the payments toward the next loan, helping you stay focused on your goals.
 

Cons

  • You’ll pay more in interest fees: By paying extra toward the loan with the smallest balance rather than the highest interest rate, you’ll pay more in interest fees than you would if you followed the debt avalanche method.
  • It could take longer to pay off your debt: Because you aren’t targeting the loans with the highest interest rate first, more interest can accrue over the length of the loan. The added interest means it will take longer to pay off your loans.
 

Which strategy is best for paying off student loans?

So which strategy is best for paying off student loans: the debt avalanche or the debt snowball? If your goal is to save as much money as possible and pay off your loans as quickly as you can, the debt avalanche method makes the most financial sense.

 

Psychologically, the debt snowball may have the advantage. According to a study from the Harvard Business Review, the debt snowball method is the most effective approach over the long-term, as borrowers are more likely to stick to their repayment strategy. However, which strategy is best for you is dependent on your mindset, motivation level, and your determination to pay off your debt.

 

Managing your student loan debt

Regardless of which repayment strategy you choose, you could save even more money or pay off your loans earlier by refinancing your student loans. When you refinance student loans, you apply for a loan from a private lender for the amount of your current student loans, including both private and federal loans.

 

The new loan has completely different repayment terms than your old ones, including interest rate, repayment term, and monthly payment. Even better, you’ll only have one student loan with one monthly payment to remember.

 

Use ELFI’s Find My Rate tool to get a rate quote without affecting your credit score.*

 
 

*Subject to credit approval. Terms and conditions apply.

 

Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.

2019-12-05
Student Loan Interest vs. Other Interest Types

By Caroline Farhat  

If you have student loans, you’ve probably been told at one point that it’s “good” debt. But what does that really mean? Is any debt actually good or is it all bad? Is the interest you pay on your student loans better than the interest you pay on your auto loan? 

 

As you accumulate more assets, you’ll encounter many different types of interest. It’s helpful to know how each type of interest differs so that you know exactly what you’re getting into when you borrow money. 

What is Student Loan Interest?

Student loan interest is essentially the cost you pay for borrowing the money. When you pay interest, you will be paying back the amount of money you borrowed plus the cost to borrow the money (the interest). The higher the interest rate, the more money you will have to pay in addition to the amount you borrowed. The amount you borrow is called the principal and the cost to borrow the money is called the interest. Interest is charged on both federal student loans and private student loans until the loan is paid in full. When you make a payment on a loan the interest is paid first, any amount of the payment over the interest is applied to the principal and lowers the balance of the loan. The types of rates and how interest is calculated are based on the type of student loan.  

 

Federal Student Loans: The Difference Between Subsidized and Unsubsidized

Federal student loans have fixed interest rates that are set by the government. They remain the same throughout the life of the loan. Also, federal student loan interest rates may be lower than auto loans or personal loans. Federal student loans have two different types of interest: subsidized interest and unsubsidized interest. A subsidized interest loan means the government pays the interest on the loan while you are in school or during deferment (a grace period from federal student loan payments granted for certain situations), which means the balance of the loan does not increase. Once you are out of school or the deferment period ends, you will be responsible for paying the interest on the loan. An unsubsidized federal student loan means the interest starts accruing from the day the loan is first disbursed. Although you may not be required to make payments on the loan while you are in school, you will end up with a loan balance higher than you initially borrowed. The interest on a federal student loan is calculated using the simple interest formula. Here is how to calculate the simple interest formula:

 

The principal (the amount of money you borrowed) X the interest rate = The amount of interest you will pay each year for the loan

 

Private Student Loans: The 411 on Fixed and Variable Interest Rates

Private student loans can have a variable interest rate or a fixed interest rate. A variable interest rate is based on the current market and economy and can change over the life of the loan. A fixed interest rate remains the same throughout the life of the loan. It’s important to note that rates can vary widely based on the student loan lender, which is why it is so important to do your research and only sign with a reputable company. The interest rate you receive on a private student loan is also based on certain financial factors, including your credit score. 

 

For example, ELFI customers who refinanced student loans report saving an average of $309 every month¹. If you currently have private student loans, you can check out our student loan refinance calculator to get an estimated rate and monthly payment for both fixed and variable options.² Whether you’ve taken out federal student loans or private student loans throughout your college journey, consolidating and refinancing could score you some significant savings.

 

Interest On Other Common Loans

If you’re in full adulting mode, odds are you have or are considering getting an auto loan or mortgage. Just like your student loans, these financial products come with interest as well. 

 

Interest rates on car loans can be variable or fixed rates and the rate you receive is based on factors such as your credit score and financial health. There are two ways interest is calculated on car loans: simple or precomputed. For simple interest, the interest is calculated based on the balance of the loan. If you pay extra on your car loan, the principal will be reduced and in the long run, you will be saving money in interest (woohoo). If you have a precomputed interest loan on a car, it will be calculated on the total amount of the loan in advance. This means that even if you make extra payments, you will not save any money on the interest over time. One big difference to note between student loan interest and auto loan interest is how it can affect your taxes. With student loans, the interest you pay may be a tax deduction you can take depending on your income and the amount of interest you have paid. With an auto loan, there is no such benefit.    

 

Interest on a house loan, otherwise known as a mortgage, is calculated similar to a simple interest car loan. An interest rate on a mortgage may be variable or fixed depending on which type of loan you choose. There are two major types of mortgage loans: 

  1. Principal and interest loans - You pay back the interest and the principal (the amount of money you borrowed) at the same time. This is the most common type of mortgage.
  2. Interest-only loans - This is when, for a certain period of time, payments towards the loan only go towards paying off the interest on the loan.
 

Mortgage loans are amortized, like some student loans, which means your payment goes towards more interest upfront. Then as the balance decreases, you pay less interest and the payment goes towards paying down the principal. Also, just as with some student loans, some of the interest you pay on your mortgage may be tax-deductible. 

 

Understanding Interest Can Pay Off

It’s important to understand the different types of interests and loans when determining which debt to focus on paying off first. Being strategic about how and when you pay off your debt can save you hundreds and even thousands of dollars. A good rule of thumb is to pay off the debt with the highest interest rate and then focus on your interest rate debt. Of course, if you have the option to refinance, explore that first and then develop your debt reduction plan.

 
 

¹Average savings calculations are based on information provided by SouthEast Bank/ Education Loan Finance customers who refinanced their student loans between 8/16/2016 and 10/25/2018. While these amounts represent reported average amounts saved, actual amounts saved will vary depending upon a number of factors.

 

²Subject to credit approval. Terms and conditions apply. Variable rates may increase after closing.

  Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.