The debt snowball is a popular debt payoff strategy made famous by Dave Ramsey, but it might not be the best strategy for student loans.
In general, it can provide just the right amount of mental oomph to help people keep paying down their debt in hopes of one day being debt free.
But is the debt snowball best for those with students loans that have varying interest rates? As it turns out, the debt snowball is actually best for certain types of people. Others will see through it and choose a different route.
In this article, you’ll learn who the debt snowball is for and who may want to avoid it.
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How Does The Debt Snowball Work?
To demonstrate how the debt snowball works, we’ll use three different student loans. All have ten year terms. Their minimum monthly payments and interest rates are displayed along with total interest over the life of each loan.
The Bankrate loan calculator here will be used.
To set a baseline for comparison, the first example makes only the minimum payments:
Loan | Rate | PMT | Total Interest |
|---|---|---|---|
$10,000 | 5.8% | $110.02 | $3,202.26 |
$25,000 | 8.5% | $309.96 | $12,195.71 |
$5,000 | 7% | $58.05 | $1,966.51 |
By making the minimum payments, total interest will be $17,364.48.
What happens when you use the debt snowball? We start with the smallest loan and add $200 to its monthly payment.
After that loan is paid off, its payment is snowballed into the next smallest balance and on it goes. Keep in mind that the minimum payment must still be made on the other loans.
Loan | Rate | PMT | Total Interest |
|---|---|---|---|
$5,000 | 7% | $258.05 | $321.48 |
Loan | Interest | Balance |
|---|---|---|
$10,000 | $950.43 | $8,640.04 |
$25,000 | $3,511.93 | $22,002.68 |
The $10,000 loan is next on the list. Its payment will increase from $110.02 to $368.07 ($110.02 + $258.05). It is paid off in another 2 years and 1 month and incurs interest of $552.85 during that time. Total interest on the $10,000 loan comes to $1503.28 (552.85 + $950.43).
We are now into 46 months of payments. The $25,000 loan now looks like this:
Loan | Interest | Balance |
|---|---|---|
$25,000 | $3,020.84 | $11,378.22 |
Its payment will increase from $309.96 to $678.03 ($309.96 + $368.07). After one year and six months, the loan is paid off. Total interest during that time comes to $778.13 for a final total of $7,310.90 in interest.
Total time to pay off all lines came to 64 months (5 1/3 years). Total interest came to $9135.66 ($321.48 + $1503.28 + 7310.90)
As you can see, the debt snowball pays off loans fairly quick and saves a lot on interest compared to making only minimum payments. This is logical since more than the minimum payment is being applied.
But does the debt snowball make financial sense?
Is The Debt Snowball The Best Financially?
Let’s now use the above scenario but this time, we’ll start with the highest interest loan. We’ll also add $200 to its payment, just like we did with the debt snowball. The loan is paid off after 5 years and 1 month. Total interest is $5818.94.
The other two loans look like this after 5 years and 1 month:
Loan | Interest | Balance |
|---|---|---|
$10,000 | $2,347.02 | $5,635.97 |
$5,000 | $1,432.11 | $2,890.90 |
We move onto the next highest interest rate loan, which is the $5,000 loan at 7%. We add the previous loans payment onto it as well. The payment goes from $58.05 to $568.01 ($509.96).
The $5,000 loan is paid off in only six months. Total interest is $52.58.
After the above six months, we are at 67 months of payments. The $10,000 loan looks like this:
Loan | Interest | Balance |
|---|---|---|
$10,000 | $2,347.02 | $5,635.97 |
It’s payment goes from $110.02 to $678.03 ($110.02 + 568.01). The loan is paid off in nine months. Interest incurred during that time is $130.64 for total interest of $2477.66.
The loans are all paid off after 76 months (6 1/3 years). Total interest is $6002.16 (5818.94+130.64+52.58). This is $3499.34 less and one year more than when the debt snowball was used.
From this, it is clear the debt snowball isn’t the best option when looking only at the numbers. Its main benefit is psychological. The fact that a loan is eliminated can be a big, positive boost to some people. It gives them the momentum to keep going.
There are also people who simply look at the numbers and that is what drives them to pay off their loans. For this group, the debt snowball presents no advantage.
Related: Debt Snowball vs. Debt Avalanche
Paying Off Student Loans In General
Another big consideration of this strategy might sound odd, but take a moment here: does it even actually make sense to pay off your student loans?
Whoa... wait - but Dave Ramsey says... This isn't about what Dave Ramsey says, but rather about what's doing the best with limited money.
For many borrowers, especially those on income-driven repayment plans like SAVE, it actually might make the most sense to put your student loans in a separate bucket, only make the required payments, and focus your snowball effort on other debts like car loans, credit cards, even your mortgage.
The reason is that income-driven repayment plans include loan forgiveness. You might also qualify for loan forgiveness programs like Public Service Loan Forgiveness. In this situation, you want to pay as little as legally allowed on your student loans, in order to maximize your loan forgiveness.
If you debt snowball your student loans in this situation, you're effectively throwing away good money.
Who Should Use The Debt Snowball?
For those struggling to get out of debt, it seems no matter how much money you throw at it, the debt still remains. The debt snowball can be just the boost to help you see there is a way out.
In the end, it will cost more but if the psychological benefit to seeing debt go away is worth the cost, there is certainly value in choosing the debt snowball.
For those that want to pay the least student loan interest, aiming your efforts successively at the highest interest loans is the best way to go.
What are your thoughts on the snowball method for paying off student loans?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared toward anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications, including the New York Times, Wall Street Journal, Washington Post, ABC, NBC, Today, and more. He is also a regular contributor to Forbes.
Editor: Clint Proctor Reviewed by: Chris Muller