Getting an education, driving your new car off the lot, buying a home—it can sometimes feel like every big life step comes with a little thing called debt. And while it’s often accumulated while making investments and purchases that can help you reach your personal and professional goals and build the future you want, it’s no secret that debt also has the potential to have negative consequences.
Though your initial purchase may bring with it an initial rush of excitement and adrenaline, eventually reality sets in. You will eventually have to pay off your debt over a period of time, perhaps with variable interest, often with an added mix of financial anxiety and chest pains.
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But debt repayment doesn’t have to be so stressful—sometimes it can even be empowering. It all depends on how you think about it and how you plan ahead.
Many folks may have a combination of shorter-term debts, like credit cards, and longer-term debts, like student loans and a mortgage.
Just making all the different monthly payments can become a chore that takes hours off your life, not to mention a big chunk of your paycheck. And if you’re just making the minimum monthly payments, it might seem like you’ll be repaying your debts forever.
Choosing a debt payoff strategy can ease your mind—and maybe even your wallet. A successful debt payoff strategy is typically one that helps you feel empowered and in control of your finances, while keeping you motivated to get out of debt as soon as possible.
We’ll take a look at some popular payoff methods, including the snowball, avalanche, and snowflake strategies. We will also explore the loan consolidation strategy. Keep in mind that each option has its benefits and drawbacks; choosing the right strategy will ultimately come down to your specific financial situation and what will most effectively inspire you to get debt-free.
Related: Tips for becoming financially independent
The debt snowball method by Dave Ramsey
The first of these snow-themed repayment methods is called the snowball method. Popularized by financial self-help guru Dave Ramsey, the concept behind this strategy is that paying off your smallest debt first (regardless of the interest rate) will give you a feeling of accomplishment that will increase your motivation to pay off your next biggest debt and, eventually, tackle all of your existing debt.
Though this method may offer a valuable morale boost that can potentially help you feel more empowered in getting your finances back on track, this method probably won’t save you as much money as paying off your debts with higher interest rates first.
Even so, it’s worth noting that a 2016 study published in the Harvard Business Review found that people using this method paid off credit card debt faster than those using other methods, for the simple reason that it’s typically easier to stay motivated when you see progress in your pursuits.
How it works: Make a list or spreadsheet of your debts (list the debt with the smallest principal balance first) along with the minimum payment amount for each of them. While making the monthly minimum payments on all debts, the strategy has you start throwing as much extra money as you can afford to spare towards the smallest of your debts.
Once you have paid this portion of your debt off, you take the minimum payment you were paying on that debt and reallocate it to the minimum payment of your next-smallest debt (there’s the snowball). The idea is that by paying off your smallest debt and increasing the amount you’re able to put towards your next smallest debt, you’ll be able to keep your momentum going and continue repeating the process until you are debt-free.
The debt avalanche method
This next method is also known as the “ladder” or “debt-stacking” method. Unlike the snowball method, which is structured around behavior and motivation, the avalanche method is about streamlining your debt repayment so that you can save the most money on interest.
The avalanche strategy can sometimes require more discipline, and the initial results may sometimes seem a bit less tangible. Even so, keeping track of how much you are saving in interest can be a great motivator for many people dealing with debt.
How it works: Make a list of all your debts by order of interest rate, from the highest percentage to the lowest. While continuing to make all your minimum monthly payments on your existing debts, the avalanche method suggests that you also “attack” the highest interest rate loan with as many extra payments as you can. In other words, send an avalanche of extra money towards the debt that’s costing you the most.
For extra motivation, you can use an extra payment loan calculator to keep track of how much you’re saving in interest.
The debt snowflake method
Taking the snow metaphor even further, the “snowflake” method can be used on its own or in conjunction with another method, such as the snowball or avalanche. The snowflake method involves finding extra income on top of your usual income to help pay down your debt faster.
Side gigs and extra work are often seen as ways to afford extra purchases or make a bit of extra cash to spend on the finer things in life. But instead of using this extra money on pleasure expenses, the snowflake strategy encourages individuals to find an additional income stream that can be dedicated specifically to paying off debts more quickly.
How it works: Scrape together extra micro-payments by any means possible: using credit card rewards cash, taking those cans of spare change to the bank, selling old textbooks or collectibles online, or even taking on a few side gigs. From there, the method suggests putting the extra cash from these projects toward extra debt payments.
Consolidating debt under a single loan
One final strategy for paying down debt is converting all your various debts into a single loan, commonly referred to as loan consolidation (no snow metaphor here).
This method has the potential to dramatically simplify your loan repayment process. Instead of multiple loans and multiple interest rates, you’d have one loan and one interest rate. And ideally, this new interest rate will be close to the average of all your interest rates combined—or maybe even lower.
How it works: Start by shopping around for the best loan consolidation or personal loan offer you can find. Once you find one and are accepted, your lender will grant you a personal loan that you can use to pay off your existing qualifying loans or debts in full. Then you’d pay back the personal loan, which is just a single monthly payment.
One potential downside to consolidating your loans is that your overall repayment period may get extended, meaning you could pay more in interest over time if you only make minimum payments on your personal loan. This said, when you take out a personal loan, you can make sure to choose a loan term that doesn’t extend your repayment period to find an option that works for you, your debt, and your financial situation.
Remember, even if you decide to consolidate some of your debt with a personal loan, you can always use the snowflake method or other strategies on the remainder of your debt.
Whatever plan you end up choosing, making consistent extra payments on your personal loan whenever possible can help you get out of debt even faster (just watch out for prepayment penalties—that’s why it’s so key to always do your research before you sign on the dotted line).
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This article originally appeared on SoFi.com and was syndicated by MediaFeed.org.
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Understanding Parent PLUS loan repayment options
If you took out loans to help fund your child’s education, such as Parent PLUS Loans from the federal government, you’re eventually going to have to start paying them back.
Parent PLUS loans can’t be transferred to your child — even once they graduate and get a steady job — so you’re the one who’s on the hook for paying them off in full. That prospect can be daunting since this may be your largest chunk of debt outside of a mortgage.
But you have lots of options for temporarily putting off payments on Parent PLUS Loans or making them affordable. The choices can get overwhelming, so here’s a guide to help you figure out which plan is right for you.
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Unlike some other federal loans, Parent PLUS Loans do not have a grace period — a six-month break after the student graduates or drops below half-time enrollment, before payments are due. Instead, their repayment period typically begins once the loan is fully disbursed.
The idea behind the delay with other loans is that it gives your child a chance to get settled financially. The federal government assumes you, as a parent, don’t need the same accommodation.
If you’re not ready to start paying, you have a couple of options for pausing repayment on your Parent PLUS Loan.
One option is to apply for a deferment, which will allow you to temporarily stop monthly payments. You can ask for a deferment while your child is still in school at least half-time, or for six months after they graduate or drop to a lower level of enrollment. Keep in mind that interest will still be piling up, even if you’re not making payments. If you don’t pay the interest during this period, it will be capitalized, or added to the loan principal, when the deferment is over, which can increase how much you owe over the life of the loan.
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If the circumstances above don’t apply, you can still temporarily stop or reduce what you owe by requesting a forbearance. You may be eligible for forbearance if you’re unable to pay because of financial hardship, medical bills, or a change in your employment situation. You may also qualify for a forbearance if you’re in a medical or dental internship or residency, if you’re in certain teaching jobs, or if you pay 20% or more of your gross income toward the loan. Interest will still capitalize during this period, but if you’re going through a temporary financial difficulty, it may be worth approaching your loan servicer for a forbearance rather than risking missed payments.
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You can’t put off payments forever. Depending on the plan you choose, you will have between 10 and 25 years to pay off the loan in full. But Parent PLUS loan repayment doesn’t have to be daunting. Here are a few of the Parent PLUS Loan repayment options you have.
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One of the most straightforward options is the Standard Repayment Plan. In this scenario, you will pay the same fixed amount each month and pay the loan in full within a decade. The benefit is that you always know how much you owe and you’ll accrue less interest than with most other plans, since you’ll be repaying the loan in a faster time frame. The difficulty is that this results in monthly payments that are too high for some people. It’s a good option if you can afford the payments and you don’t expect your situation to change in the next ten years.
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Another option is the Graduated Repayment Plan. You will also pay off your loan within a decade, but the payments will start out smaller and then increase, usually every two years. You’ll pay more overall than under the previous plan because you’ll accrue more interest, but less than if you were to sign on for a longer repayment term. This plan is a good option if you expect to earn more in the relatively near future.
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Extended Repayment Plan: A third choice is the Extended Repayment Plan, which spreads payments out over 25 years. You can either pay the same amount every month, or have payments start out lower and ramp up over time. You’ll end up paying more over the life of the loan because you’ll be racking up interest over a longer time period. But it’s a good way to make monthly payments more affordable while knowing you are on track to pay off the loan in full.
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Parent PLUS borrowers don’t have as many opportunities as students do for getting a portion of the loan forgiven. There are no income-driven repayment plans for Parent PLUS loans, even though the government offers four such plans for students.
That being said, you do have a couple of options:
- Income-Contingent Repayment Plan: You do have one option for tying payments to your income, but you have to jump through one hoop first — you would need to consolidate your Direct PLUS loan (or loans) into a Direct Consolidation Loan through the federal government. This combines your existing loans into one and may change your monthly payment, interest rate, or the amount of time in which you have to repay the loan. Just note that Direct PLUS Loans received by parents to help pay for a dependent student’s education cannot be consolidated together with federal student loans that the student received. Once you consolidate, you may be eligible for the Income-Contingent Repayment Plan. Under that plan, your monthly payment would be no more than 20% of your discretionary income. If you make the monthly payment for 25 years, the remaining balance will be wiped away, though you may owe taxes on it. This can be a good option for making your payments affordable if you expect your income to remain relatively low for the foreseeable future.
- Public Service Loan Forgiveness:Another way you might be able to get your loans forgiven is by signing up for Public Service Loan Forgiveness. You might qualify if you work in a public service job, including for a government organization, nonprofit, police department, library, or early childhood education center. Note that you are the one who has to work in this field, and not the student.
Make sure you submit an Employment Certification Form every year or when you switch jobs. To qualify, you also need to take out a Direct Consolidation Loan and then start repayment under the Income-Contingent Repayment Plan. If you work in public service, this can be a very effective way to get the loan off your back within a decade.
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If you’re looking for another way to tackle your Parent PLUS loan, consider refinancing your parent plus loans with a private lender. This involves taking out a new loan and using it to repay your old one.
The benefit of refinancing is that you may qualify for a lower interest rate or a lower monthly payment, especially if you have a solid credit and employment history. However, when you refinance federal loans with a private lender, you will lose eligibility for any federal repayment plans or loan forgiveness programs.
You can get a preliminary quote online in just a few minutes to see whether refinancing makes sense for you.
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By taking out a Parent PLUS loan, you are generously supporting your child to achieve their dreams of a higher education and a solid career — but that doesn’t mean that loan payments need to become a burden for you. If you learn about your options for reducing or managing payments, you’ll be on track to paying off your loan with peace of mind.
One such option you might consider is refinancing your Parent PLUS Loan, which could help you secure a lower interest rate or monthly payment.
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This article originally appeared on SoFi.comand was syndicated by MediaFeed.org.
SoFi Student Loan Refinance
IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS PLEASE BE AWARE OF RECENT LEGISLATIVE CHANGES THAT HAVE SUSPENDED ALL FEDERAL STUDENT LOAN PAYMENTS AND WAIVED INTEREST CHARGES ON FEDERALLY HELD LOANS UNTIL THE END OF JANUARY 2022 DUE TO COVID-19. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE IN DOING SO YOU WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS.
Notice: SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income-Driven Repayment plans, including Income-Contingent Repayment or PAYE. SoFi always recommends that you consult a qualified financial advisor to discuss what is best for your unique situation.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
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