My wife and I both have steady full-time jobs that pay pretty well while also having a good amount in student loan debt. We have other debts too, like a mortgage, credit cards and a car loan. We started snowballing our debt after listening to a Dave Ramsey book and we are excited about what we achieved so far.

Well now that I started an MBA program, my student loans have been placed into deferment. And the loans that I had are government loans, so the interest that is being accrued is getting paid for by Uncle Sam.

Now I can't decide whether to place the payment I was making towards student loans into the snowball. I feel that since the snowball method says to pay the minimum on all other debts except the smallest one, we should now move that money over. Technically the minimum on my student loan is $0.

Is that a wise decision considering that I will be finished with my schooling in late 2020?

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    What else would you do with the money? What is the interest rate on the student loans, credit card, etc?
    – Hart CO
    May 9 '19 at 22:06

The "snowballing" method is good psychologically, because you manage to get small debts out of the way quickly. Some people need the psychological help, or they will spend all their money and not pay back any debt it all.

Now you've done this for a while, you can move to the method that is the most efficient, but psychologically harder: Take the loan with the highest interest rate, and pay as much as possible off that loan. (Within reason; if you owe $10,000 at 19% and $1,000 at 18% interest, it's fine to pay the $1,000 back first, but not if it's $1,000 at 5%).

That's because if you pay $1,000 back on a 19% loan, you save $190 a year in interest, but if you pay $1,000 on a 5% loan, you save only $50. So take the money you don't have to pay back because of deferment, and pay it back on the loan with the highest interest rate. Usually credit cards are the highest and mortgages the lowest.

  • This is good advice in general, but doesn't really address the question of how to handle the loans in deferment.
    – Hart CO
    May 10 '19 at 0:46
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    @HartCO A loan in deferment = interest at 0%, so this is essentially an answer. It gets more grey if the student loans are the highest interest-rate loans before deferment though, but I never found an algorithm for that case
    – Mars
    May 10 '19 at 1:18
  • Oops, and it actually says in the answer: "So take the money you don't have to pay back because of deferment, and pay it back on the loan with the highest interest rate"
    – Mars
    May 10 '19 at 1:19
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    @HartCO Like I said, it gets grey if the student loans are the highest before considering deferment! In that case, I don't know the rule (although it's easy enough to check the results). I have yet to see a program or calculator that takes deferment into question when choosing the optimal payment schedule, but if you know of one, I:d love it if you could show me! Either way, OP is snowballing, so they aren't likely to care about the most optimal payment plan anyway, so I think treating the deferred loans as 0 is not an unfair cheat
    – Mars
    May 10 '19 at 4:07
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    @Mars It'd just require payback time period estimates and loan details. Anyway, I don't disagree that it's easy enough to just ignore it and it may be most practical to do so, but it just kind of feels like a repeat of dozens of other debt repayment answers by not factoring it in, no big deal.
    – Hart CO
    May 10 '19 at 4:28

We started snowballing our debt after listening to a Dave Ramsey

The snowball method has nothing to do with the interest rate or amount paid monthly to a debt. The snowball method is to arrange debts smallest to largest in terms of total money owed. Make the minimum payment on every debt EXCEPT the smallest one. Pay as much as you can to the smallest debt until it's paid off.

Your question seems to say "My student debt is the next in the snowball, but the interest rate is zero, so should I just skip it and go to the next one." This would be a debt avalanche, not a snowball.

If it's federal loans, I probably would skip over that debt and go to the next one for several reasons, all having to do with the interest rate being zero

  1. Paying off a credit card will increase your available credit, which is good for your credit score

  2. Paying off something like a car means you own it free-and-clear, and it's something you can borrow against if you absolutely have to (but avoid this).

  3. Federal loans have more consumer productions than most loans.

  4. Dave Ramsey has to give blanket advice because he has millions of listeners. It's OK to deviate occasionally.

  • You should not treat the student loan as zero interest, you have to look at the effective interest rate over its lifetime. (Analyze it like a credit card with 0% for 12 months and then jumps to 26%... except the jump is less drastic)
    – Ben Voigt
    May 10 '19 at 3:15
  • 3) However, federal loans are not discharged in bankruptcy. Having repaid them helps if you end up needing to file bankruptcy. May 10 '19 at 3:46

"Debt Snowball" involves making the minimum payment on each debt and then devoting extra money to paying off the smallest debts first.

"Debt Avalanche" also involves making the minimum payment on each debt and then devoting extra money to the debt with the highest interest rate. As the highest interest rate debt is paid off, the rate of repayment accelerates, costing the debtor less in the long run.

The benefit of the "Debt Snowball" technique is psychological which for some is beneficial. I have no clue why anyone who wants to get out of debt would throw away money in this manner. Even Ramsey acknowledges that this method is not as cost effective.

I also think that this is one of those 'much ado about nothing' situations where an author fabricates a complex answer to a problem with a simple answer.

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    "I have no clue why anyone who wants to get out of debt would throw away money in this manner." You said it yourself. Psychology. Sometimes we use little tricks to get ourselves to do things that are hard.
    – Ryan
    May 10 '19 at 0:09
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    I guess snowballing acts to save time on the paperwork of servicing small debts. Once that's down to a manageable monthly load, the time-money tradeoff favors avalanche. May 10 '19 at 0:52
  • My guess is that if one needs such psychological tricks to get out of debt (at a slower rate) then the chances of getting out are slim because the discipline needed is lacking in the first place and something else is going to derail the game plan. Motivated enough to read the book but not motivated enough to save money? It makes no sense. As for saving the time on the paperwork of servicing small debts, that only makes sense if the interest rate differential is small. Carrying 18.90% credit card debt in order to pay off lots of 5 to 10 % debts is a Pyrrhic victory, May 10 '19 at 1:18
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    Debt Snowball also means that if you suddenly encounter financial stresses again, the sum of your minimum payments is smaller, no?
    – Stephen S
    May 10 '19 at 2:47
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    I'm going to take a pass on your circular logic. The bottom line is that if one decides that it's time to get out of debt, the best way out is to pay down the highest debt rate first, regardless of the size of the debt. That's the fastest way out. If you need to be disciplined with some tricks and take the long way out, that's your prerogative. May 21 '19 at 10:25

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