Financial Literacy for Students: Debt Repayment

The Debt Snowball method is a strategy to pay off debt by beginning with the debt that has the smallest balance. The goal of this method is to build momentum by completely paying off loans starting with the smallest..

How it Works:

1. List all of your debt in order beginning with the smallest balance and continuing down to the highest balance
2. Make the minimum payments on your debt, and put as much extra as you can on the one debt that has the smallest balance
3. Once that debt is paid off, apply that same amount to the debt with the next smallest balance
4. The amount you are paying on the debt you are focusing on keeps growing as other debts are paid off, like a snowball rolling down a hill
5. Continue this method until all of your debt is paid off

Benefits:

• Dopamine - Every debt you pay off will feel like a victory which will help motivate you to keep going

Drawbacks:

• Requires discipline - The goal once a debt is paid off is to not create more debt. For example, when you pay off a credit card, do not then go and put more charges on it

The Debt Avalanche method is a strategy to pay off debt by beginning with the debt that has the highest interest rate. The goal of this method is to save money on interest and pay off debt faster.

How it Works:

1. List all of your debt in order beginning with the highest interest rate and continuing down to the lowest interest rate
2. Make the minimum payments on your debt, and put as much extra as you can on the one debt that has the highest interest rate
3. Once that debt is paid off, apply that same amount to the debt with the next highest interest rate
4. Continue this method until all of your debt is paid off

Benefits:

• Save money - you'll pay less in interest over time
• Pay off debt faster

Drawbacks:

• Requires discipline - You must be consistent in making extra payments
• May be intimidating - Your highest interest rate may also be your largest balance

Debt consolidation rolls multiple debts into a single debt with a single payment.

How? You apply for a debt consolidation loan, and the funds distributed from this new debt consolidation loan are paid directly to your outstanding debts to pay them off. It is important to remember that just because your previous debts (like credit cards) may be paid off, you shouldn't build their balances back up, or you will be dealing with another payment, which is what you are trying to avoid with the debt consolidation loan.

This can be a good idea if you qualify for a low enough rate, or if you have multiple debts that you are struggling to keep track of. Sometimes just having one payment, instead of several, can help keep you organized.

Depending on the type of your Student Loans, they may not be able to be added into a debt consolidation loan. For information on debt consolidation and Student Loans, please see the Student Loans page.