Paying off Debt

While in school students will undoubtedly accrue debt, but knowing this fact and understanding the responsibility that comes along with debt is key to obtaining financial independence. It is far too easy for students to get a $4,000 refund check and spend it carelessly on new clothes, a concert or new video game system. One student even admitted to spending $2,400 on a tattoo. College for many, is the first opportunity to be independent, make decisions and be in charge of finances. When students support themselves it is often due to loans or credit cards, money that seems to be free flowing with just a signature. The responsibility that comes along with debt does not actually hit home until the student receives their first bill, and for many this occurs long after graduation. Our goal is to intervene in this process and help students finance their education with as little damage as possible to their credit.

For students that find themselves in this boat we suggest reading some personal finance blogs. Generally these are much easier to relate to (they tend to come from financially secure individuals of modest means) and contain a glimmer of entertainment value. We particularly enjoy blogs that follow an individual's progress in paying down debt. We love MFA or Bust because the blogger updates her progress towards her financial goals on the right side of the blog. We admire her because she managed to pay down over $7,000 in credit card debt-- and continues to never hold a balance on her credit cards.

How did she do it? She mentions that she uses the debt-snowball method of repaying debt- she tackles those credit cards or loans that carry the lowest balance and pays them off first. This method of repayment has its benefits and detriments, however, and relies heavily on proponent Dave Ramsey's opinion that personal finance is "20% head knowledge and 80% behavior." This means that while you may end up paying more over time by tackling the accounts with the lowest balances regardless of interest rates, small wins like finally paying off one card completely, is a motivator. Here's how the snowball method works:

Our fictional friend Mike has three credit cards with balances. To make things simple, let's say that card A has a balance of $100, card B has a balance of $200, and card C has a balance of $300. He would make a list of his debts from the least amount owed to the highest amount owed. Then, he would make the minimum payment for each credit card each month. Any extra money he can put toward debt repayment would be funneled towards the card A entirely because it has the lowest balance.

But what if card B has the highest interest rate? Wouldn't it be more mathematically and financially sound to pay off that card first? This would be an entirely accurate assessment if we took the human element out of the equation. The truth is, some people can't move forward with serious debt repayments if there are no obvious rewards. Psychologically speaking, short term rewards like being free of one credit card company are more motivating than the long term reward of reducing interest payments over time.

Repaying debt is a journey, no one source can tell you how best to handle your debts. Your best option is to explore as many venues as possible. Just remember that like saving, paying off debt requires not only a goal but a source of motivation.

Keep up the good work,

Savvy Student