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Here is my situation:

Loan Balance Rate Payment

Stafford Loan 14,252.82 4.00%(fixed) 116.35
Private Loan 24,357.72 8.00% (variable) 348.96
Parent Plus Loan 9,892.95 7.75% (fixed) 247.12

I can either pay the lowest balance first (Dave Ramsey Snowball method), or I can pay the highest interest loans first. My mind is fried right now and I used a calculator which indicated high interest should be paid first (which makes sense). But I did some manual calculation to see how fast I can pay the loans off, and it kinda showed it would take the same amt of time to pay them off… I’m hoping there is a finance wizard who replies to this and tells me I’m silly and paying high interest first makes the best sense… Also, would anyone know what the variable interest rate cap on a private student loan is??

Thanks!

2 Thoughts on How do I pay off my debt? Snowball Vs. High Interest?
  1. Reply
    bobby d
    July 12, 2011 at 12:07 am

    Mathematically, pay the higher interest rate first.

    Dave advises to pay off the smallest balance first so that you get excited about the debt snowball. In your case, I’d pay off the Parent Plus loan since it is the smallest and nearly the same interest rate as the private loan.

    use the debt reduction calculator in the link below

  2. Reply
    mldjay
    July 12, 2011 at 12:24 am

    The reason Dave says to pay off the smallest balance first is because it is a psychological “high” to get something paid off. From experience, his method works. I have done the nerd thing and figured out how much “faster” it would be to pay it off by highest % first, it was only about 2 months “faster.” Not a big difference!

    From his website:
    Myth: I should pay off the debt with the highest interest rate first to get out of debt quickly.
    Truth: You should pay off the smallest debt first to create the greatest momentum in your debt reduction.

    The math seems to lean more toward paying the highest interest debts first, but what I have learned is that personal finance is 20 percent head knowledge and 80 percent behavior. You need some quick wins in order to stay pumped enough to get out of debt completely. When you start knocking off the easier debts, you will start to see results and you will start to win in debt reduction.

    We’ve developed a little process called the “Baby Steps” to do one thing at a time and keep the debt reduction process simple. The Baby Steps are the foundation for your Total Money Makeover.

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