Paying loans properly — Snowball? Avalanche? SNAVALANCHE!
Should you pay back loans the fast way or the motivating way? Why not both?
In 2018, I decided I would get out of default and get serious about paying back my student loans (ideally by 30). I didn’t know where to start. Like most millennials, I searched the internet for answers.
Books like Broke Millennial and articles on the internet all referred to the same advice: the snowball method and the avalanche method, both techniques made popular by Dave Ramsey.
So what are they?
The Snowball Method
List out all of the balances you owe in order of their principal balances. It should look something like this.
Loan 1: $1,000
Loan 2: $2,000
Loan 3: $3,000
The snowball method dictates that you pay all the required minimums on every loan — if necessary — and then use the excess to target a single loan with the smallest balance.
(Some loan servicers have their default settings set to spread out your auto-payments across each loan. Don’t fall for this trick. Focusing your firepower is more useful than paying tiny amounts on all your loans.)
Snowballers will pay the necessary minimums on their loans and then focus the rest of their money, on the loan with the smallest balance. Once the loan with the smallest balance, Loan 1, has been defeated they turn their attention to Loan 2.
Loan 1 out of the way means there’s one fewer required minimum payment to make each month. This money can now be put toward repaying Loan 2.
The snowball grows.
While paying the required minimums on Loan 2 and 3, Snowballers are then able to focus on getting rid of Loan 2 as quickly as possible until that’s gone too.
The snowball grows again.
With one loan left, a Snowballer can put Loan 1’s required minimum payment, Loan 2’s required minimum and any excess money all toward Loan 3, making light work of that $3000 bill.
The snowball method is all about gaining momentum, so when it comes time to take on those big balances, you’ll be ready.
So how about the avalanche method?
The Avalanche Method
The bullshit thing about student loans is that there’s another important number to consider in addition to balance: the interest rate. Avalanchers pay off those three earlier debts this way:
Loan 3: $3,000 @ 8.5%
Loan 2: $2,000 @ 6%
Loan 1: $1,000 @ 3%
The avalanche method requires you to pay off your debt with the highest interest rate first. Why? Because even though Loan 3 may have the largest amount owed, it’s also costing you the most money in the long run, with the balance increasing at a rate of 8.5%.
“This sounds like torture,” you’re probably thinking. “Why do it this way?”
The snowball method keeps you motivated along the way, letting you rack up small wins before you take on the big, scary loans. Unfortunately, the avalanche method overall is faster and you’ll pay less money over time.
With this in mind, I share with you my method of loan payback:
The SNAVALANCHE Method
(It can only be written in all-caps.)
Here’s how debt payback looks when arranged in SNAVALANCHE order, and I’ll use numbers closer to my actual loan balances to illustrate the point:
Loan 1: $575 @ 6.55%
Loan 2: $2,800 @ 6.8%
Loan 3: $2,700 @ 6.55%
Loan 4: 3,700 @ 6.55%
Loan 5: 10,000 @ 6.55%
Loan 6: 8,500 @ 6.55%
Loan 7: 2,750 @ 4.25%
Loan 8: 3,600 @ 5.35%
Loan 9: 5,800 @ 6.55%
Loan 10: $5,500 @ 3.15%
Let’s zoom in for a closer look at some of the choices here:
Loan 1: $575 @ 6.55% — I have no full-time job, this is all I can afford to pay off right now. I’m sorry but it is what it is.
Loan 2: $2,800 @ 6.8% — I got a job! Let’s try this avalanche thing — starting with the smallest balance.
Loan 3: $2,700 @ 6.55% — Still chugging along, goodbye high interest debt.
Loan 4: 3,700 @ 6.55% — Things are going well, screw you forever debt.
Loan 5: 10,000 @ 6.55% — Okay, landed a temporary side gig. Let’s see if I can take on my biggest scariest loan.
Loan 6: 8,500 @ 6.55% — Okay, that went well. Another temporary side gig, let’s try to take on my second scariest loan.
Loan 7: 2,750 @ 4.25% — Wow, this is tough as shit and also, no side jobs this time. Let me treat myself with a small win. Enough of these giant battles.
Loan 8: 3,600 @ 5.35% — Slightly bigger than the last one, but I think I can handle it.
Loan 9: 5,800 @ 6.55% — This is basically the same size as the other one I have left, might as well eliminate the higher interest one.
Loan 10: $5,500 @ 3.15% — Say your prayers, student loans.
At the time of this writing, I’m still in the middle of paying these off (currently a few weeks away from paying Loan 6). I say all this to point out that it’s okay to stray from the rules of the snowball or avalanche from time-to-time.
Between Loans 1-5, I’ve had unemployment throw me off track, medical bills throw me off track, surprise expenses throw me off track and more. It’s okay if you’re not a die-hard avalanche or snowball person the entire time; you can flow between the two. The power of SNAVALANCHE, is that anyone can be a SNAVALANCHER, SNAVALANCHING between their loans at any point, no matter if they generally prefer the snowball or avalanche methods. Whichever snowy path you choose, anything is better than staying buried beneath your cold, cold loans.
(This post is part of the What I’ve Learned series, cataloging tips and tricks I’ve picked up since I’ve gotten aggressive about paying off my student debt. I am not a certified financial planner nor some kind of money professional — do other research too! Some of the post’s links may be affiliate links that I earn cents from. Click them to support me. Or do not!)