Options When Paying Off Your Student Loans

Managing student loan debt is overwhelming. It’s common to feel like you will never get out from under a mountain of debt, especially if you’re making only the minimum payments on all of your loans. Those minimum payments may feel easier in the short term, but you could be doing it for years—possibly decades. You need a plan to pay off student loans sooner rather than later. Luckily, you’ve got options. The avalanche and snowball strategies are the most common.

Plan A: The avalanche

With the avalanche method, you tackle the loans with the highest interest rate first. You make the minimum payment on other student loans. Interest compounds on installment loans like student loans. That means you pay interest on the principal and the interest on the loan. Higher interest rate loans compound more quickly—so it makes sense to pay those off first.

Plan B: The snowball

When you follow the snowball method, you pay off the smallest loans first, without worrying about interest rates. You pay the minimum on your other loans. Smaller loans “come off the books” fast, and you’re soon making payments on fewer loans.

Plan C: Refinance

Refinancing involves consolidating your loans so you have only one payment. With interest rates fairly low at the moment, refinancing could save you a substantial amount of money. There are two potential hitches: you have to qualify, and you give up some of the features of Federal student loans, such as being able to defer repayment. Read more about refinancing student loans to learn if it’s right for you now or in the future.

Which method is right for you?

Avalanche debt reduction means paying less overall than the snowball method. But there’s one major drawback: large, high-interest loans can take a long time to pay back. You may not feel like you’re making progress, and your motivation could wane. In contrast, you see quick wins with the snowball method—which provides incentive to keep making bigger payments on your target loan.

Choose the avalanche method if the idea of paying less overall will keep you motivated enough to stick to your plan. But many people find that the snowball method provides better motivation. Some choose a hybrid strategy, where you pay off a few small loans and then switch to the avalanche method.

Refinancing may be the best option for people who are financially ready to forego some of the flexibility of traditional student loan terms. Whatever your goal, study your budget to see which method makes the most sense for you.

Plan smart: Avoid negative amortization

As you decide which plan is right for you, you’ll want to be aware of negative amortization. That happens when the compounding interest on a loan exceeds the amount of your monthly payments. When that happens, the total amount you owe will continue to grow, even as you make payments. Check your loans and make sure none have minimum payments that put you in negative amortization territory. Learn more about loan amortization.

After choosing the plan that’s right for you, be diligent about following it. Don’t skip payments or slip back into old habits. The financial results that you’ll see should motivate you to stay on track—and maybe even inspire you to pick up the pace of repayment as your income grows. Already inspired? Read about how you can repay student loans even faster.