These 2 popular debt payment strategies could help you with your student loans

With student loan payments due in a few weeks and consumer credit card debt topping $1 trillion for the first time, it’s key to know your strategy for paying off your debt.

Looking to save on interest payments? Or trying to find a system that will keep you motivated? The avalanche or snowball method could help.

What is the avalanche method?

With the avalanche strategy for paying off debt, you pay off the debt with the highest interest rate first, said NerdWallet personal finance expert Kimberly Palmer.

That reduces the amount of interest you pay overall.

First, you should ensure you know the interest rate for each loan and sort them from highest to lowest.

You make the minimum payment on each debt and put any extra money (after paying for necessities) toward the highest interest debt. Once you pay that one off, you’ll use those extra funds toward the loan with the next highest interest.

“it’s called the avalanche because it’s kind of like building momentum by paying off that high interest debt first,” Palmer said.

For example: Let’s say you have $10,000 in federal student loans at 4.5%, a $15,000 car loan at 7% and $2,000 in credit card debt at 26%. You have $500 in your budget that you can use to pay off debt.

To keep it simple, let’s say each one has a minimum monthly payment of $100.

After paying the minimums ($300 total), you have an extra $200 to put toward the credit card debt. Once the credit card is paid off, you’ll take that minimum monthly payment and the extra money to put toward the car loan (a combined total of $300). After that’s paid off, you’ll combine that with the minimum on your student loans for the full $500 a month.

What is the snowball method?

With the snowball method to paying off debt, you start with the smallest debt first — regardless of the interest rate.

“This one is really popular for people that just want to make sure they’re being motivated and you might have some celebrations and smaller victories along the way,” Palmer said. “ It just feels really good when you pay off that smaller amount first and it just keeps you motivated and keeps you going.”

The snowball method works similarly to the avalanche method in that you still pay the minimum monthly payment for each debt. The difference is that you start with the smallest debt. But once that’s paid off, you’ll take how much you were paying toward that debt and use that to knock out the next one.

For example: Let’s use a similar scenario as above. You have $3,000 in federal student loans at 4.5%, a $5,000 car loan at 7% and $10,000 in credit card debt at 26%. You have $500 in your budget that you can use to pay off debt and each as a $100 minimum monthly payment.

You’ll go after the student debt first, as it’s the smallest amount, putting any extra money toward that debt. Once you pay it off, you’ll put that money toward the car loan until that’s paid off. And you’ll tackle the credit card debt last.

Because you’re paying the highest-interest debt last, it usually takes longer and costs you more in interest to use this system. But if you need those early wins for motivation, this system could work for you.

It’s also possible that your highest-interest debt could be your smallest debt, such as if you carried $1,000 in credit card debt at 26%, a $5,000 car loan at 7% and $3,000 in student loans at 4.5%.

What about consolidation?

Another option to consider is debt consolidation.

When you consolidate debt, you combine multiple debts into a new loan or form of credit at a lower interest rate, according to Investopedia.

“For some people, it could make sense to consolidate your student loans which basically means that you’re shopping around to take your multiple loans to a single lender,” Palmer said.

For credit card debt, that could mean opening a new card and transferring your balance. Finding a card with an introductory interest rate of 0% could be especially beneficial.

If you refinance federal student loans, that means taking them private. Palmer said the biggest drawback to that would be losing government benefits, but that consolidating could be particularly helpful for those with multiple student loans through more than one lender.

Some private student loans have variable interest rates. Palmer said that means the rates can fluctuate as the Federal Reserve’s federal funds rate changes. The Fed, in its efforts to lower inflation, has raised rates 11 times since March 2022.

“Right now because we’re in an environment where rates are rising, those variable rate loans can also become more expensive,” Palmer said.

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