42. Debt Series Part 3: Payoff Strategies + Student Loans

 Taylor Gilbert (00:00)
Hello everyone, welcome back to the Social Work to Wealth podcast. This is my debt series episode three, last episode of the series. Today I'm going to be talking about debt payoff strategies and student loans. So let me get right into it. There are two main debt payoff strategies that typically hear people talking about. The first one is the avalanche method, second one is the snowball method.
So with the Avalanche method, you're targeting the debt with the highest interest rate and you're making minimum payments on everything else. And then any extra money that you have, you're throwing it at that debt with the highest interest rate. So mathematically, this is more efficient because you're going to pay less overall because you're cutting out the most expensive debts first. So for example, if you had a 20% credit card with a 24% interest rate and a personal loan at 10%.
You're gonna start with a credit card first. This is why I said it was important in episode the debt series episode one to do your debt inventory and write out who you owe, how much you owe them, what's your interest rate so that once you get to this point, you have a list of all your debts and you can make a plan.
Brett and I decided to do the avalanche method first. I think it was important for us to try to save as much money as we can. So getting that high interest rate credit card gone was high our highest priority.
So recap on the avalanche method, you list out all your debts, the one that has the highest interest rate, that's the one that you attack first, and you're paying minimums on all the rest and then you move on after you pay off that first one, you move on to the next highest interest rate, and so on and so forth.
Another popular debt payoff method is snowball method. So this one's a little different. So instead of going with the highest interest rate, you're gonna go with the smallest balance first. Same with the Avalanche, you're gonna pay minimums on everything except the one that you're attacking first, putting all your extra money towards that one.
And this one you're not looking at the interest rate, it's just what's the smallest balance. And this one is kind of psychological because you're getting wins a little faster because you're paying the smaller balances off first.
So say you have an $800 medical bill. Once that's gone, you cross it off your list, you get some momentum, it's exciting, it's empowering. So that's one reason why some people might pick the snowball method. With this method, you are starting with that smallest balance, and then after you're done with that one, you're taking all the money that you were putting towards it and rolling it into the next loan or next debt.
And then the next debt and you're rolling the money, all the money just keeps getting rolled into the next debt that you're working on. And so it kinda there's this snowball effect if you imagine a snowball rolling down a hill.
the money that you're putting towards the next debt and the next debt just keeps getting bigger and bigger and bigger.
So that's why they call it the snowball method. There is another method that I've heard of called the lasso method. And I think this was coined by the debt-free guys. They're a personal finance couple, but essentially you're lassoing, quote unquote lassoing, so taking all of your debts and putting it and transferring it to one debt, one loan or credit card. So for example, if you had medical debt.
Credit card and then a personal loan, you would transfer all of those to one personal loan. So you have one payment, one loan that you're working on.
I've seen people do this with credit cards. So if you have multiple credit cards, high interest rates, and sometimes credit card companies will give you an offer and say, Hey, if you sign up for this credit card, we'll give you a 0% interest rate for 12 months or 24 months. so what some people will do is they'll transfer their current credit card balances because
There's the high interest rate to that zero percent so that they're not getting charged interest every month.
And typically there is a balanced transfer fee, but what I've seen is it's worth it and cheaper than the rate that you're gonna get charged every month on your twenty-two, twenty-four percent card.
The one thing about this method, the lasso method, and transferring balances is then, you know, if you had a credit card, that your your previous credit card now that has a zero balance, even though you you just transferred it over to this new card that has a zero percent interest, but now your first card that has a zero zero percent balance, and sometimes it can be a little tempting to start using again So I think
If that is a method that you're going to try, just being intentional and mindful about spending up that other card that now has a zero balance.
Brett and I really had to work on spending the money that we had in our bank accounts. And I saying it out loud, it's like, duh. But we were so used to using our credit card because we wanted points. And it was not working well. And it was we were just racking up this balance. once we started revamping our budget, we just decided, okay, we're gonna pay off this card, but we're actually gonna stop using our credit card.
And that really helped build a habit of seeing how much money do we have in our bank account? That's the money that we can spend. We're not we don't have unlimited funds with this credit card.
So maybe you need to take a break from using your credit card. I don't know. And I know some people feel FOMO about not having point or you're not getting points, but honestly, it's a wash. If you're paying interest on your credit card, the points don't matter. The way to maximize your credit card points is to not is to pay off your balance every month.
So which method do you pick? Honestly, it's really the one that you're going to stick with. You can mix you can mix and match. Whatever you want to do, whatever's going work for you. You can start with the snowball method, maybe pay off your lowest debt first, get some momentum, and then switch to the avalanche method and start paying off the high ones with the highest interest rate. Honestly, just try it. Try it out and see what works for you.
If you are someone who's really motivated by the numbers and you can stay focused on the long-term goal, then maybe Avalanche might be the one to pick and or if you want a quick win and you know yourself well enough that you might fall off if you don't see something like getting paid off soon, then maybe snowball is the one for you.
But honestly, there's no wrong answer, there's no best strategy. It's just the one that's going to keep you moving forward.
The other thing I will say about debt payoff journey is debt payoff journey stuff is that one thing that I realized during ours is it's not linear. You might take one two steps forward, one step back. So I think that's also just something to remember and keep yourself grace around. I feel like I'm saying that a lot. Keep yourself grace. But honestly, we really do need to in
in this world in general, but
You might make some progress and then there might be a setback. You might make some more progress and then there might be another setback. But as long as you keep pushing forward, you will get there. One other thing that's helped me in our journey is tracking our progress because that is super motivating to see okay, what did we start with and what did we end with? Honestly, a simple Google Sheet does not need to be fancy or just write it down.
I have like a thermometer tracker. I need to find it. I'll link it in the show notes. But just something so that you can be reminded of the progress because sometimes when you're in it and you have a lot of debt, you know, Brett and I in 2020, was it 2022? Yeah, 2022 started with $277,000. We have about $10459 left or something like that. But this is gonna take you know, it's we're four years in.
This is we're in the we are in the thick of it and sometimes it can just feel like, my gosh, we're still doing this. But when I look back and see, wow, we started at two seventy seven, we paid off that one debt, we paid off that other debt, it just helps remind me how far we've come. And so I think that's a helpful thing to do as well.
Okay, I wanna talk about student loans because this is one of those debts that's a little special in the way in a way that you can get it forgiven. And so it kind of changes the way that you decide to attack it.
And I know a lot of social workers, I know a lot of us have student loans. So I'm like, how can I not talk about this? So knowing what you have regarding federal versus private, the federal loans are the ones from the government, stuff like thing I'm sure you've seen the names direct subsidized, direct unsubsidized, plus loans, etc. And then there's private student loans. You can potentially get that from Sally May, Discover, your credit union, whatever.
If you're unsure about your if it's federal or private, studentaid.gov is the website that you would log into to see your loans, your loan balance, the interest rate, all the details of that.
If your loans are not there, then maybe you have private and then you would have to log into that specific lender's website.
Private loans, unfortunately, do not have much flexibility. They do not have income-driven repayment plans. They do not have any forgiveness plans. If you're struggling with payments, they are very inflexible. And so I think one word of caution is I think sometimes people are persuaded or it's recommended that they refinance into their federal loans into a private loan. And I definitely
would talk to a student loan professional about that before before you do that. Because the federal loans, there's forbearance, there's deferment if you are struggling with your payments. Sometimes there's the administrative forbearance. You know, we had the COVID nineteen forbearance where we didn't even have to pay, but those payments were counting towards public service loan forgiveness. They have income driven repayment plans. So
If your income is really low, then ideally your payment's low.
They have provisions that you may not have to pay or you can get your debt discharged if you were be to become disabled or get cancer. There's a lot there's a lot more protections with the federal loans,
So just be cautious if there's someone telling you to refinance your loans into the private loans 'cause you lose a lot of protections there.
So I want to talk about the income-driven repayment plans really quick and what's happening right now. I know there's a lot of stuff going on, it's a lot of news about student loans, and July 1st is kind of an important date in terms of what types of payment plans you're gonna have access to. I'm sure that many of you are on the Save Forbearance right now.
What's happening is starting July 1st, loan services are going to start sending out formal 90-day notices to everyone who is still in save and telling them to pick a new repayment plan. And so if you don't pick a repayment plan within the 90-day window, you will be automatically transferred to the standard repayment plan, which is going to be much higher than all of the other income-driven repayment plans. So in short,
An income-driven repayment plan is based off of your income. The standard repayment plan is based on the amount that you owe.
So typically that amount is way higher than any payment that you would be making on an income driven repayment plan. So I think that's just one thing to remember. Try to get on an income-driven repayment plan. There are multiple. There's income-based repayment, there's income contingent repayment, there's pay as you earn. There's multiple. And then there's also a new one repayment assistance plan or rap
The thing that I think that's important to mention about this is I know that many of us are going towards public service loan forgiveness. So for those who don't know what that is, is if you work for a nonprofit agency or a government agency, which most of us do, the idea is you work full-time and you make 120 qualifying payments, which is 10 years.
So after ten years your loans are forgiven and no public service loan forgiveness is not going away right now.
And we are making plans as if it is going to continue to stay.
So I bring up PSLF Public Service Loan Forgiveness because being on save did not count towards the payment count for public service loan forgiveness.
So getting off that and getting onto an income driven repayment plan as soon as you can, you can start counting those payments again so you can get closer to forgiveness.
And only the income driven repayment plans are the ones that qualify you for public service loan forgiveness. So recap there, you need to be on an income driven repayment plan, work at a nonprofit or government agency, and then make 120 payments or 10 years of payments. And it doesn't have to be consecutive, it can be scattered. One thing I think people forget to do is do an employer certification form. So essentially,
You go on studentaid.gov, they've made they've made it a lot easier to get your employer to certify your employment. You put in their email, put in their details, it gets sent to it gets sent to the HR person or whoever in your organization who would sign off on that. And then it's good.
If you're wondering about what your payment might be on any of these plans, student loan planner, I really love student loan planner. They have an income based repayment calculator. So I'll link that in the show notes.
I will also link the employer certification form, verification form. I think that's really important to do at least once a year.
This was just a quick snapshot about what's going on in the student loan space. There's a lot, but if you're feeling lost about this, which is totally understandable, I s I would point you to Student Loan Planner. I've been an affiliate with them for about four years now, three years. I think that they provide an amazing service. I've gotten a consult through them. I believe that my link would give you get you $100 off. It is a little pricey, but
You will talk to a certified student loan professional and they can help you get clarity on what to do next.
So I will also link that in the show notes.
And I think moral story for student loans is now is the time to dig into what plan you're on, what's going on, log into your accounts. Now is the time. I'm urging you now. I'm reminding you, I'm I want to push you to start figuring out what's going on with your student loans because this is important.
And I know that there are some individuals who are in school right now, and some of this doesn't really apply to you because if you take out any loans after July 1st, 2026, you only have access to one income-driven repayment plan, and that's the repayment assistance plan, the rap plan. So you guys aren't in repayment right now. I wouldn't really worry about it.
But I think this piece of the student loan conversation is really for those individuals who are working, who aren't planning on taking out any more student loans after July first, twenty twenty six. This is the time to figure out what's going on with your student loans.
Okay, so that is that's the episode. little recap. Episode one, we talked about mindset and debt inventory, knowing what you're working with before making a plan. Episode two, talked about budgeting, cash flow, investing, emergency funds, finding your margin.
And then today, payoff strategies and student loans. So again, take what you need, leave the rest.
If you want to chat one on one about your money, I'll put a link in the show notes as well. And as always, thank you so much for listening and
We will be dropping an episode next week.