Student loan debt has steadily increased over the past decade, with total debt reaching as high as $1.4 trillion in 2017, ballooning into the country’s second-largest source of consumer debt behind housing.
While paying off college loans are difficult enough, the interest on them is what prolongs the repayment process because it takes longer to pay off the original loan amount.
Minimizing the interest-paid on student loans can be the decision one makes today that will lead to long-term wealth building as Nathan Greene, the certified financial planner for Shoemaker Financial, puts it.
Debt snowballing is a debt-reduction strategy that is well suited for millennials with multiple student loans because of its simplicity.
“Once that loan has been aggressively repaid, its payments can then be rolled to the next loan, and so-on down the line,” Greene says.
Financial planners suggest this strategy:
Order your loans from the smallest to the largest.
Pay the minimum amount on all loans, except the smallest one.
Devote as much money as you can to the smallest loan until it is completely paid off.
Repeat steps 2-3, each time with the smallest debt until all debts are paid in full.
Greene stresses that with student loans, paying off the smallest debt is not always the best option. Mathematically speaking, the debt with the higher interest should be paid off first so you don’t end up paying more money for a loan.
However, you might find that paying off a smaller loan is better for you to build momentum in knocking out one chunk of debt at a time.
“Many student loan holders don’t have a spending problem, but it is still psychologically a more successful approach than dropping money into a large balance,” Roy Janse, a certified financial planner for DeHollander and Janse Financial Group, explains.
it offers and provides information on each’s eligibility requirements and monthly payment structure.
Repayment plans that are configured based on your income such as the Pay As You Earn plan provide more flexibility to choose how much you pay and when. It does have some drawbacks. You have to update the government on your financial standing every year, so Greene advises people go with the 25-year extended repayment program because it can be less of a hassle.
Refinancing your loans is another popular choice for those who don’t qualify for loan forgiveness programs because this option usually leads to you saving more money down the road.
This alternative involves taking your loans to a lending agency, which in turn will issue you a loan contract with a new interest rate (usually in the 4%-7% range) and repayment schedule that is determined by a combination of your income, credit-worthiness and debt-to-income margin, among other criteria.
You can also look into a shorter repayment timeframe because you will usually get a lower interest rate. On the flip-side, a longer repayment timeframe might be more helpful to those who can only devote a small amount of money each month, but it will take longer to pay off the principal balance.