Another school year has ended, and another class of fresh, optimistic graduates is entering the job market — and packing a whole lot of debt.
Looking at the large sum of money owed to a school, the U.S. government or a private loan company can be daunting. But, don't worry; you can do it. And knowing how to do it the "right" way will help make the expense go away with less money and maybe in less time, too.
If you ask financial guru Dave Ramsey what the best way to pay off debt is, he'll refer you to the debt snowball method. Taking this route will leave you feeling great — psychologically — but you might end up spending more money over time.
If you choose this route, full of small personal victories, you'll cover the monthly minimums on all your loans but then throw any extra money at the smallest loan until it's gone. You'll then keep paying off the next smallest loan — and the next, and the next — until, finally, all your loans are paid off.
Each time you pay off a small loan, you're going to feel great. And those mental highs should keep you motivated to get rid of debt. But going by pure math, that's not the cheapest strategy, and it may take longer to become debt-free.
The cheapest strategy is the debt stacking method, or debt avalanche, in which you throw your extra money at the loan with the highest interest rate. If you take this route, you'll end up paying less money over the life of your loans — and you'll probably pay off the debt more quickly.
That's because by eliminating loans with higher interest rates first, you're not allowing that interest to grow — and paying less overall.
The "right" method for you really depends on whether you need those quick victories to stay motivated or whether you actually want to pay less in getting rid of your debt.
This video includes images from Nicholas Menghini / CC BY 3.0, Martha Ormiston / CC BY 3.0 and Creative Stall / CC BY 3.0. Music via Kevin MacLeod / CC BY 3.0.