Sunday, July 15, 2012

Paying Off Student Loans Early Strategies

In the current depressed economic climate, many young professionals are having a difficult time staying current with the monthly payments on their student loans. However, for 20 somethings that have been lucky enough to get a good paying job and are interested in paying off their student loans early they have a couple of options.

One strategy is that any extra money, money above the monthly loan payment, should be put towards the loan with the highest interest rate. This strategy minimizes the total amount of interest that will be paid over the life of a 20 something's student loans.  From a purely monetary standpoint this is the cheapest strategy to employ.

The other strategy that is promoted by many people, including popular financial adviser Dave Ramsey, is to put the extra money towards the loan with the smallest balance. The benefit of this strategy is that a young professional can minimize the amount of payments they have to make each month. By paying off the smaller loans quickly, a 20 something can see very clearly the tangible benefit of putting there extra money towards their student loan debt. Also, once a small loan is paid off the money that had been allocated for that loan can be put towards the next smallest loan and so on. This is called payment "snowballing".

My Opinion: With my background as an engineer and being a confessed "numbers guy" I choose to utilize the strategy of putting my extra money towards the loans with the highest interest rates. I am very dedicated and interested in managing my finances, so I use the strategy that is the cheapest. I do this because I have little fear of losing interest even though I haven't paid off any of my loans yet. I do believe that for somebody who is not as interested in money and has a more difficult time managing their finances, that the strategy of paying off smaller loans first is the better choice. Typically these people need to see the gratification of paying off loans along the way to stay focused on paying extra towards their loans versus going to the mall to get that feeling.

Which school of thought do you follow?

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