With this method, you will organize all of your loans from smallest to largest. You then make minimum payments on all of your loans except the smallest. You pay as much as you can on the smallest loan until it is paid off. You then move on to the next loan. Repeat this process until the loans are all paid down.
- Organize Loans From Small To Large
- Pay Minimums On All Loans Except The Smallest
- Pay As Much As Possible On Small Loan
- Repeat The Process Until All Loans Are Paid Off
Why Debt Snowballing Works
With this method you get the satisfaction of seeing loans paid down. It is psychological in that it is much more satisfying to see a loan get paid off quickly. If you were to start with the largest loan, it can seem like the money being paid is getting you nowhere. Paying the smallest loans first will make it appear that you are actually getting more done. It is a great motivational tool to keep at it.
When Debt Snowballing Might Not Be Best
This method is not always the best from a numbers standpoint. The quickest way to pay down your loans would actually be to pay off those with the highest interest first. Doing so would decrease the total amount that you ultimately pay. The highest interest rate loans are not always the lowest ones though and paying off a larger loan first is not as emotionally satisfying.
Why Should You Pay Off A Lower Interest Small Loan First
The debt snowball method is about changing your attitude towards paying off your loans. You need to see the rewards that your hard work is producing. You will see these rewards much quicker on a smaller loan. An example. You pay $200 on a $1000 loan. Wow, you have just paid off 20% of the loan. Now take that same $200 and apply it towards a $10,000 loan. You have paid off just 2% of the loan. Not nearly as satisfying is it.
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Loan Forgiveness Programs
Who wouldn’t want there loans to simply disappear? There are various programs available to facilitate loan forgiveness and your ability to qualify for them will vary. Here are some of the bigger ones.
Public Service Loan Forgiveness
To qualify for this program, you need to work full time in specific areas of public service. One of the following categories:
- Federal, state, local or tribal government organizations.
- Not for profit that is exempt under IRS code 501(c)(3).
- Non profits whose main purpose is to provide one of the following services: emergency management, military service, public safety, law enforcement, public interest law services, early childhood education, public service for disabled, public service for the elderly, public health, public education or other school based services.
Full time work is when you meet your employers definition of full time work or work 30 or more hours a week.
Only direct loans will qualify for the PSLF but those you receive through the Federal Family Education Loan may become eligible once you consolidate them under a Direct Consolidation Loan.
Loans must be in good standing and 120 qualifying payments must have been made. Qualifying payments must be for at least the amount on the bill and can not be more than 15 days past the due date.
As you can see, like with all federal programs, this one can be quite complicated. If you think you may qualify, start your research here.
Income Based Repayment
This is not a typical forgiveness program but it can be a life saver if you are in a low income job and are saddled with a good deal of student loan debt. This plan caps your payments at a percentage of your discretionary income, typically 10 percent although some IBR plans can go as high as 20%.
You will make payments on the plan for 20 years if your loans were all for undergraduate work. You will pay for 25 years if your loans also went towards graduate work. Any remaining debt will be forgiven after that time.
Your payments will not always stay the same with this plan. They may increase or decrease as your discretionary income changes. This can occur if you start making more money or if your family size changes.
Not all loans will qualify under this program although some will be eligible for inclusion if your loans are consolidated under Direct Consolidation.
If you think you might be interested in this plan, you should get more information here.
Perkins Loan Cancellation
The Perkins Loan program is a guaranteed loan program that ended in 2017. You can no longer get Perkins Loans but you may be able to get them cancelled.
You may be able to get 100% of your Perkins Loans cancelled if you work in a qualifying public service job for five years. Here are some of the qualifying careers.
- An attorney employed as a public or community defender.
- Family services worker for high risk children and families in low income areas.
- Educator in a PreK or state childcare program.
- Head Start program employee.
- Law enforcement or corrections.
- Faculty at a tribal college or university.
- US armed forces in a hostile fire area.
- Nursing or medical technicians.
- Speech pathologist or librarian.
- Peace corp volunteers.
You may also be able to have the loans cancelled in a bankruptcy, if you become disabled, due to a death or if your school close before you earn your degree.
If you think that you might qualify for loan cancellation, you need to cancel your school. Perkins loans were disbursed directly by educational institutions so they also handle cancellation requests. Be prepared to show proof that you work in a qualifying public service position.
Teacher Loan Forgiveness
The Teacher Loan Forgiveness Program may forgive up to $17,500 in loans if you work full time for five consecutive years in a low income school or educational service.
A teacher under this program is someone who provides direct classroom teaching or classroom type teaching in a non classroom setting. You must have a bachelors degree and have achieved state certification.
If you want to see if your school qualifies for low income status, you should check the Annual Directory of Designated Low income Schools.
For more information on specifics of the program, you should begin your research here.
Refinance Your Loans
If you do not qualify for forgiveness, refinancing the loans can be a good idea. This will generally lower your required monthly payment and perhaps your interest rate.
You can accelerate your repayment of your loans by choosing a shorter repayment time period. Shorter periods will usually come with a better interest rate which will assist you in paying down your debt.
If your discretionary income is low, a longer repayment period may be in your best interest. Longer terms will come with higher interest rates in most cases.
Refinancing your loans into one can also make repayment less complicated and time consuming.