Paying it Back: Snowball or Avalanche?

The age-old question: what's the better way to pay back loans, snowball method or avalanche method? If you're not familiar with either method, there's a good summary over at Student Loan Hero.

For the TL;DR:

Snowball method: paying off the lowest dollar amount loans first

Avalanche method: paying off the highest interest rate loans first

Choosing which method is best for you depends on a couple of factors

1. Personal satisfaction paying off loans
2. Discipline

Let's look at each of these factors individually.

Personal satisfaction paying off loans

I am fortunate enough to have a doctorate degree and a high paying job to go with it. However, that comes with a cost; about $140,000 in my case. Although it's a lot of money, it's still below the average of $157,000 back in 2016. Like many student loans, my loans are broken in to multiple smaller loans from each academic year. I have interest rates ranging from 1.26% to 6.55% and balances ranging from $2,500 to over $40,000.

Let me tell you, paying off a loan of any value feels absolutely amazing. However, the penny pincher in me knows that the $2,500 loan at 1.26% is going to cost me much less money than the $40,000 loan at 6.55%. Besides, I can make more money with that $2,500 loan in a high-yield savings account. While it would be nice to get rid of that loan, I'd actually lose money paying it off.

Let's say I unexpectedly come across $2,500 out of the blue. Paying that lower dollar amount loan will gain me personal gratitude instantly but it comes at a cost: $751.96 to be exact (assuming a 10 year repayment). For me, doing this math and realizing how much I would save by throwing it at the 6.55% loan is much more satisfying.

Discipline

It can get very tedious and tiring paying off student loans. It seems insurmountable, daunting, overwhelming, (insert synonym here)...  Going with snowball lets you attain multiple, albeit smaller, goals. It keeps you on track and it makes you feel as though you've accomplished something. However, keep in mind that it will cost you more money. If you're disciplined, you can stick with the avalanche method.

My advice: Go with avalanche but set milestones.

Every time you pay off part of a loan (say $5,000 or $10,000), buy yourself something you've been wanting, go out to dinner, celebrate any way you want (within reason). It allows you to have some satisfaction paying down the loan while still being as economical as possible.

These views are my opinion and do not reflect professional financial assistance.