The avalanche method beats the snowball method for paying off student debt

July 12, 2018

The snowball and avalanche methods pay down debt quicker by making extra payments. The snowball method applies extra payments to the loan with the lowest loan balance. The avalanche method applies extra payments to the loan with the highest interest rate. The avalanche method is more effective for student loans.

There are no prepayment penalties on federal and private student loans, so nothing stops borrowers from accelerating repayment of their student loans. But, how one applies the extra payments can have an impact on the amount of time and money required to pay off the student loans.

The avalanche method is better than the snowball method

The snowball method argues that paying off a succession of small loans, one after another, will yield “quick wins” that help motivate borrowers to stick with making extra payments.

The avalanche method, on the other hand, saves borrowers more money by paying off the most expensive loans first. This reduces the average interest rate on the student loan debt as the highest-rate loans disappear.

The snowball method works best with small loans, like credit card debt. It doesn’t work well with student loans, which tend to have larger loan balances. Student loans are paid off in decades, not months to years like credit cards, event with extra payments. There are no quick wins with student loans.

Accelerating repayment of the loan with the highest interest rate first will not only save the borrower more money, but it will also cause all of the borrower’s debt to be paid off quicker.

Example of accelerating student loan repayment

Suppose a borrower has two loans, a \$5,000 federal student loan at 5% interest and a \$7,500 private student loan at 7% interest. The monthly loan payments are \$53.03 and \$87.08, respectively, on a 10-year repayment term.

Suppose the borrower has an extra \$100 a month to prepay her student loans, paying a total of \$240.11 per month toward the two loans.

• If she follows the snowball method, she’ll apply the extra \$100 to the \$5,000 loan first, since it has the lowest loan balance. With the extra payments, this loan will be paid in full in 36 months, at which point the \$100 a month plus the \$53.03 per month from the \$5,000 loan is applied to the \$7,500 loan, in addition to that loan’s regular monthly payment. The remaining debt is paid off in 26 months. The total interest paid on the two student loans is \$2,255.53 and all student loans are paid in full in 62 months.
• If she follows the avalanche method, she’ll apply the extra \$100 to the \$7,500 loan first, since it has the highest interest rate. This loan will be paid in full in 46 months, at which point the \$100 a month plus the \$87.08 per month from the \$7,500 loan is applied to the \$5,000 loan, in addition to that loan’s regular monthly payment. The remaining debt is paid off in 15 months. The total interest paid on the two student loans is \$1,988.83 and all student loans are paid in full in 61 months.

Both methods save time and money, since repaying the student loans over a 10-year term without the extra \$100 a month would cost a total of \$4,313.87 in interest and require 120 monthly payments. Paying an extra \$100 a month saves more than \$2,000 in interest and knock almost five years off of the repayment term.

But, the avalanche method saves an additional \$266.70 in interest compared with the snowball method and pays off the debt in full one month sooner, freeing up room to start saving for a child’s college education

Although the snowball method pays off one of the loans quicker than the avalanche method (36 months vs. 46 months), taking three years to pay off the loan is hardly a quick win.

Use our Loan Prepayment Calculator to see how much you can save and how much sooner you can pay off your loans by making extra payments.

A good place to start:

See the best 529 plans, personalized for you

×