Student debt is becoming an increasingly large issue with 44.2 million Americans with student loan debt, as reported by the Federal Reserve, the central bank of the United States. Of that 44.2 million, the average monthly student loan payment is around $351.
In addition to student debt, students often have various other debts, including credit card payments and car payments. Other common monthly financial obligations include groceries, phone bills, rent and more. Students must analyze their monthly income and monthly fixed expenses to determine the best method for paying it off.
Paying off debt quickly will help eliminate financial burdens and allow more room to save for emergencies and retirement. Deleting debt takes patience and a plan. While there are several different methods that are commonly used to reduce debt, the methods vary in effectivity depending upon the financial situation of the individual. The two most common methods include debt stacking and debt snowballing.
Debt stacking is a method that recommends prioritizing debt in order from highest interest rate to lowest, not the overall balance. It is critical to consistently pay the minimum payment on all debts while simultaneously paying an additional amount of money toward the debt with the highest interest rate. Keep paying this additional amount of money toward that debt until it is completely paid off, and continue to work down the interest rate list with this method until all debt is paid off.
This method will help to eliminate additional money spent on interest rates as time progresses. However, it will take longer to pay off debts with higher balances.
Debt snowballing is a method that recommends creating a list of all debts in order from the lowest remaining balance to the highest balance, regardless of the interest rate. Then, while paying the minimum payment for each loan every month, put any additional money toward the debt with the lowest balance. Continue with this payment method until the lowest debt is completely paid off and then move down the list to the next highest debt.
The idea behind this method is less about saving more money in the end, but rather feeling a personal victory when being able to pay off a debt, regardless of how little it may have been. This feeling will, in theory, motivate people to keep following this method and to keep saving money to pay off larger debts. However, this may cost more money in the long-run because the debts with higher balances may potentially have the highest interest rates and will continue to multiply.
What works for one person and his/her financial situation may not work for another. People should choose the method that best fits within their monthly budget, level of motivation and financial goals. Start paying off debts as soon as possible. Just be sure to have a plan and stick with it.