So I’m a pretty typical Millennial. The average student who graduated in 2016, graduates with $37,712 in debt. I’d say I’m a pretty typical student in this regard. I graduated with a grand total of $35,800 in student loan debt. This was with paying off what I could while I was still in school and working. But the end had come and it was time to start repayment.
To pay off my student loans I had to go through several steps.
Choosing a Repayment Plan
First of all I had to choose a repayment plan. When I looked at my choices I saw that I had to choose between a Standard plan and a Graduated repayment plan.
The Standard plan is a plan where you pay the same steady amount every month for 10 years (or however many years your repayment plan goes for) . This is the most popular plan and the federal government’s student aid site says that this payment plan will result in paying less over time (in interest).
With the graduated plan, you still pay over 10 years but the payments start out low and then increase in the amount every 2 years. This is sold as a good option if you graduate and then have lower income but you expect to make more money over time. This plan will end up with you paying more over time because you’ll accumulate more interest.
Those repayment plans assume that you will pay the amount listed each month and no more though. I have more radical plans for repayment myself. I would rather pay them off a little bit quicker than 10 years.
Paying them Down the Snowy Way: Snowball vs. Avalanche
For paying off loans quicker there’s 2 accepted approaches: the Snowball and the Avalanche. Both are named after snow related things.
The Snowball method says that you should look at all your student loan groups and then concentrate on paying more towards the loan that has the smallest amount so you can get rid of them faster while paying the minimum towards all your other loans. This method is commonly recommended because once you pay off one loan you feel immense satisfaction and you can then take the money you were going to pay towards that one and then you have it to pay towards the other loans. The disadvantage is that this will probably result in you paying more interest on your loans over time.
The Avalanche method says that you should look at your student loan groups and then concentrate on paying more towards the loan that has the highest interest rate. This one is good because the way loans screw you over is with interest accumulation. The loans with the highest interest rates are growing the fastest even as you pay them. So you want to pay down the highest interest loans so that they grow less. This plan will generally amount in you paying less in interest over time (pay less!) but also it can be hard for some people because it’s possible that your loan with the highest interest rate may be big and it may be difficult mentally to stick with the plan over time since it takes longer to pay off a single debt at first.
What did I decide to do? I Choose All the Methods!
Well when it came time for me to pay off I took a look at my own finances and loans. I had a bunch of different loans (9 different loans!) with interest rates all over the place (highest was 7%, lowest was 3.4%). I considered what I should do….
I chose to go with a combination of avalanche and snowball with a combination of standard and graduated plans. Well I have tendency to over complicate everything so I chose to go with what I calculated would get rid of my student loans the fastest. This is a very hands on approach.
So I looked at the monthly amount that I would need to pay per month on the standard plan and it was just under $400 a month. Then I looked at what I would pay with the graduated plan in the first 2 years ($170).
I’m going to take the avalanche method by paying off the groups that are higher interest first. But when I have several loans that have the same interest rate I will pay off the smaller ones first in that group. With that in mind I will pay off my 7% interest loans first. But with what money? I figured that I would budget to pay the standard amount of $400 a month each month but I want to pay the minimum towards the lower interest rate loans.
I formally signed up for the graduated plan starting at $170 a month. I will pay the minimum payment of a combined $170 a month to all of my loans. But remember I budgeted $400. So then I have $400-$170 = $230 total dollars each month to go towards my highest interest loan. Over time, I will pay off the highest interest loan and I will put the money difference towards my next highest loan.