If you’ve been following along with my series on debt, I’m sure you are motivated and want to get debt free and/or stay debt free. A question people often struggle with on the road to debt recovery, “What do I pay first?” A big factor to consider in that discussion is interest.
Although Ryan and I are very motivated to pay off our debt, we aren’t currently accumulating interest. This is because all of our loans were federal subsidized school loans. This means that the federal government paid the interest until we are out of school. As we understand it, interest begins accumulating as soon as we graduate, unless we continue to be enrolled in a degree program.
Ryan’s school loans began accumulating interest the day that he finished his degree last December. There is a six-month grace period before the first payment is required, but interest still accumulates in that time. So we were bound and determined to have his loan paid off asap so we wouldn’t collect interest. His loan was paid just after he finished his degree. I think we ended up paying about $7 in interest. We’ll settle for that.
Because I am still enrolled in a full-time program, pursuing my grad degree, my loans are not yet collecting interest. Our goal initially was to pay these loans off before I graduated with my grad degree. But guys, we decided to shoot for the moon. Our self-afflicted deadline is to be debt-free by Jan 1, 2017. We’re well on our way if we continue working extra and budgeting well. If we succeed with our goal, we will never pay interest on my college loans. I cannot wait to make that final payment and be done!
High Interest Loans
All that to say, we’re not really dealing with interest much, but you might be. Almost every other kind of debt besides subsidized loans and borrowing from family would require interest. If you are in credit card debt, common for Americans, interest plays a huge role in your story. Credit card interest can be absolutely crazy high. For example, you can put $500 on a credit card with an interest rate of 15% and a minimum payment percent of 3%. If your making minimum payments of $15 per month and nothing above that, you will end up taking 44 months, almost 4 YEARS to pay off $500. That’s paying an extra $150.85 in interest. Yikes!
If you didn’t quite follow those numbers, that’s okay. Check out this Credit Card Interest Calculator. You can type in the rates for your card and your balance. This can be super motivational.
“What do you pay first?”
So obviously, you want to pay off your loans with interest quickly. Financial advisors do not all agree on what to pay first. Some will advise making extra payments targeted at your highest interest loan first, then next highest, and so on. Others will suggest that you pay the loan with the smallest balance first then let that snowball into paying the next smallest. I’m no financial advisor, and I don’t have credit card loans. I’m just going to say, it doesn’t really matter. I’m saying that because I honestly believe that if you get serious about paying off debt and you pick a “plan” or course of action, you will achieve your goals. Don’t get bogged down with how which debt payment plan will save you 25 bucks more, just pick a plan and work HARD to pay it off. You’ll be satisfied when it’s paid.
I think to pick a plan that works for you, you need to consider your personality. Some people are motivated by numbers. Picking the plan with the highest interest rate and paying that off first makes sense to them because that seems to be the way to save the most money. Ryan is this way. He likes to tackle the biggest debt/obstacle first then it feels like it’s “all downhill from there.”
I tend to be motivated by successes. Picking the smallest loan and paying it off means I accomplished paying off an ENTIRE loan! Then I tend to be more motivated to pay another one because I have already experienced success. Either way you cut it, you’re paying off your loans. Consider what will be most encouraging to you and what will make you want to stick with the program and keep making payments.
Tips and Thoughts
- Pay for necessity bills before paying extra on loans. You don’t want to end up taking out another loan because you paid things out of order.
- Always pay minimum payments on each loan that is collecting interest before you decide to pay extra on one. Keep paying those minimum payments to avoid injury to your credit score and avoid extra fees slapped on top of you. From a principles standpoint, paying your minimum payment is keeping your promise that you agreed to when you signed the loan.
- Extra is extra, no matter how small. Even if it’s only paying an extra $10 a month. Extra is extra and it adds up.
I hope these ideas and comments have been helpful. No matter what you choose to pay off first, keep to your plan and watch those numbers shrink!
I’d love to hear about your plans and successes in comments below!