Large Student Loan Debt's Place In Debt Snowball Plan

In just the last week, two readers emailed in with similar situations. They are beginning to set up their debt snowball plan, and both have large student loans (large, as in excess of $50,000, more than half of their annual salaries).  Fortunately, both readers took advantage of consolidation opportunities and have locked in very low rates on their student loans.  Still, they are concerned about owing so much money on school loans in addition to other smaller debts.

We basically subscribe to the Dave Ramsey “baby steps” method of managing our finances, though we’ve tweaked his plan a bit over time to fit out needs.  According to Ramsey, things like large, second mortgages should go to Baby Step 6, “Pay Off Home Early,” which comes after paying off other debts, setting up an emergency fund, and funding retirement and college savings.  I believe this is also a good spot to move large student loan debts.

Both readers indicated it would take “years” to pay off their student loans.  If they could pay off the student loan debt, and all other debts within 12-18 months I might offer different advice, telling them to stick it out to become debt free before jumping on the remaining baby steps.  However, putting other goals on hold for years could be detrimental to their financial health, particularly the missed opportunity of compounding growth for things like retirement and college savings.

My advice is to continue to pay minimum payments on student loan debt until the following three things are in place:

  • All other non-mortgage debts have been paid.
  • A solid emergency fund of six months of living expenses is funded.
  • Contributions are being made to retirement and college savings accounts, if applicable.

At that point, I would continue to pay my mortgage payment, and begin tossing every additional penny I could scrape together towards repaying the student loan.  When it is gone, use that same intensity to pay off your mortgage early.  The entire process may take ten or fifteen years, but when you reach that point you can begin to build some serious wealth.

Please share your thoughts in the comments section, in the spirit of helping out these two fellow readers. In other words, feel free to disagree with me!


  1. One thing I would like to suggest is that first they take a very long hard objective look at their “living expenses”. And they absolutely have to stop using credit cards!! Use one for gasoline, a necessary expense and that will help with building credit. Or if that leads to temptation, they’ll have to depend on their payment activity to look good on credit and stop using credit cards altogether. You imply the income is $100K. Let’s say the take home pay is $7000 each month. If they think they need a big expensive house with a mortgage payment of $3000 a month, but they could instead rent a small studio apartment for $1500, that’s not going to hurt them financially in the long run. If they eat out all the time and have a shoe addiction and have to buy $300 purses, and have to buy name brand clothing, and widescreen televisions and the latest Wii game, they could cut out these expenses or cut them down dramatically. If they have expensive tastes, they will use every bit of their income calling it “living expenses” and would never get around to the 6 month nest egg and would never get to paying off the school debt until it had probably doubled or tripled. I say lower the living expenses to the bare minimum and sock away 3 months. In our economy it is probably a good idea for a young person fresh out of college to have a nest egg in case they are laid off. I’m sure you told them about the debt calculators that will help to give a picture of what they could do. It helps me to be able to see how making an extra payment here and there could lower the bill in the long run.

  2. I totally agree with your advice. Between my husband and me, we have about $75,000 in student loan debt, at a fixed interest rate of 1.65%.

    We don’t pay anything beyond the minimum and don’t plan to. We may not even pay it off early (I know, anathema to Dave Ramsey).

  3. I am a student in England and so far ahve ammased £11,00 of debt and I intend to carry on the frugal ways I have now but I do consider myself fortunate as so far unless i earn over £15000.00 a year I do not have to pay it back and then the minimum is calculated on monthly income . I feel for those who haven’t got this option makes things very hard. love the blog thanks for posting.

  4. I would add that paying off the mortgage before the student loans also has its advantages. First, a student loan is an unsecured debt. The mortgage is secured by the property. If the debtor has extinguished the mortgage on the home and meets very difficult times, the student loan lender has several options with which to deal with the debtors inability to pay (deferment, forebearance, income sensitive repayment plan) that the mortgage lender does not have. If all else fails, the only thing the student loan lender can do is to get a judgment lien on the property. In most cases, there cannot be a forced sale to satisfy the lien. This leaves the debtor, with only a lien on the property that will only have to be satisfied when he/she sells the property. Secondly, the student loan interest is an above the line deduction. Mortgage interest is an itemized deduction. The debtor will be able to deduct student loan interest from income and take the standard deduction (assuming the lack of mortgage interest would preclude him/her from itemizing). Paying off the mortgage first likely leaves the debtor in a more housing secure position and will him/her to employ a better tax avoidance strategy. Just my take.

    • Au contrair, your wages can be garnished and your assets (house) can be taken for upaid student loans. Uncle Sam (taxpayers) wants his $ back.
      If you make over 75K the interest on stufdent loans is not tax deductible.

  5. @7. Michael

    Most student loan debt is not bankrupt able, so it actually carries more risk than a mortgage.

  6. I think it’s a mistake to put off paying the student loans. As a follower of DR, you know that it requires a “gazelle-like” intensity to become debt-free and begin wealth building. I don’t have a real problem with creating a big emergency fund, but I do think it’s a mistake to start thinking retirement and college savings before paying that loan off.

    By making an exception for $50k in student loans, you are psychologically allowing yourself to *not* become debt-free. How long before someone in that situation starts *allowing* for another form of credit?

    And no offense, but over $50k in student loans doesn’t exactly reek of financial fitness. So, my suggestion would be to follow the baby steps as outlined. Small victories are required. And, honestly, a married couple with college degrees should really have no problem paying of a $50k low-interest student loan within 18 to 24 months unless they have a real income problem. Putting loans on the back burner is not going to help that.

  7. Michael- Thanks for pointing out the drawbacks of paying off student loans before mortgage. That’s what I had been thinking….it’s great to have it confirmed. I know many people who have had to negotiate payment plans with the student loan companies, not so much negotiating happens with mortgage companies. And, of course I am all about paying it all OFF!

  8. Michael (and others), I hear what you’re saying, but bear in mind that some people do have the willpower and wherewithal to hold off on early payment of student loan debt without adding on additional debts. I have a pretty big student loan, but the interest rate is a quarter of a percent — that’s right, a quarter of a percent. We save for retirement (max out 401k every year, along with Roth IRAs), have a large emergency savings fund, and save in 529s for both our kids. I’ll pay my loan off, for sure, but at a quarter of a percent, I won’t pay it off early at the expense of retirement, college, etc. BTW, we have ZERO credit card debt.

  9. Michael is right. The psychology involved in aggressively paying off debt makes it important that you get the debt paid off now.

    If I’m sitting on $35k in debt and get a bonus at work of $1,000, having a more relaxed attitude towards debt repayment means a new purse for the wife, and xbox for me, and then a few hundred on the loans.

    With the exception of mortgages all loans need to be paid off aggressively. No the math doesn’t work out best this way, but psychologically it’s the only option.

  10. Re: Ash That’s fine. I understand that you’re playing a numbers game. Keep this in mind, you’re still saving, investing, etc… while you have a “sizable” student loan debt. If you have the will power to avoid new debt, why wouldn’t you just pay it off? Do you enjoy having this student loan because it has such a low interest rate?

    Any way you justify it… it is still an outstanding debt that you must pay at some point. Putting off the inevitable will not make it go away. And regardless of how low the interest rate is, I’d rather have that money making interest as opposed to costing me interest.

  11. Great article!

    Our family is coming to these crossroads now. The final consumer debt – a car – will be paid off this month. That leaves “only” our mortgage and student loans. In our case, we both went to law school and racked up student loans that individually more than rival our home loan. A few of the private loans are broken up into different categories and are relatively smaller balances. We may knock those out this year, but we’re going to build up an emergency fund of at least $10k first. We’ve been on our baby emergency fund for 2 years now, so it’s time to increase the Murphy-repellent, as Ramsey would call it.

    We’re still debating the mortgage vs. student loan snowball payment. I plan to write on that as we begin to address it further in a few months. Those with comments above have made valid points on either side of the issue.

    One point I’d like to add – Dave Ramsey wants you to follow up the baby steps, and leave the mortgage for last. But he also says that DEBT=RISK. So in my (I would say pretty unique) situation, given the sheer amount of loans we have, which provides more risk to me by waiting to pay it off — mortgage or student loans?

    My initial impression is that if a financial disaster occurs in our household, we’d rather have our home paid for first. Student loans can be deferred, but homes get foreclosed on. To me, it provides the greatest risk aversion.

    If I were in another situation where I had just undergrad loans or minimal grad school loans, my answer would definitely be different, because the student loans could be knocked out significantly quicker. But even being ‘gazelle-intense’, our loans won’t be done for 5 years.

  12. Aren’t you still racking up interest if you defer your student loan payment? If it’s a huge balance, than you’re going to rack up bigger debt while trying to get out of the hole in the worst case scenario.

    In fact, I would say the mortgage offers less risk, because you can always sell the house (if the worst-case financial scenario happens). You can do nothing to get out of the student loan. You can’t sell your degree and pay the balance on the student loan.

  13. Snowballing is great. We just paid off my $5800 student loan (private) in 6 years, and now put that $150 payment towards my car. We have two car payments and both of our Federal loans. This will speed everything up. We paid off the private loan first, as it was the smallest. Next is my car, then the fed loans. Hubby’s car will be last, as it has the lowest interest, and would probably even be done with ‘regular’ payments before the fed loans. It works for us as we have a decent emergency fund and his job is secure.

  14. We have left my husband’s student loan out of the picture for the time being. After we paid off mine (his has a much lower interest rate, and was for a slightly higher amount) we moved on to our other goals. We could have kept chipping away at his, but frankly our money can be put to better use elsewhere.

  15. This comment/question is coming a little late, but I’m wondering if anyone has any advice on using a Home Equity Mortgage to pay off student loans. Risky or not? I’ve unfortunately locked into a 8.25% on a school loan that is just around 11K. With mortgage interests so low, I’m wondering if paying off that school loan with an home equity loan would be good??? That would then leave me with just mortgage/home equity debt.

  16. I am debt-free, has never had consumer debt and have a net worth of slightly under 1M (after 6-digit osses last year…). So you can consider it a “rich” person’s opinion who is very bottom-line oriented and wouldn’t EVER consider any method that resulted in wasted money (like “snowball”). And really, if Dave Ramsey is so smart how come he was advising his followers to invest money in index funds last year when really smart people were getting out of the market? While I choose to pay off my 7% mortgage when I made money on the sale or rental property, I have a multi-millionaire friends who choose to take mortgage on their vacation home even if they could pay cash for it. I’ll explain their reasons later.

    There are a number of issues to consider with student loans.
    1. Student loans cannot be dismissed in bankruptcy, so if they are at high interest or variable rate or if there is any issue of being unable to pay the premiums (e.g. loss of job), then they should be higher priority. If your interest rate is high, you may consider taking advantage of 0% credit cards offers if you have access to those. This is a bit risky since you’ll only have a small window to repay the loan before the interest rates go up: you may be able to get another card and transfer balance but in current economy these offers my dry up. So this method – transferring balance to 0% – may be more useful for loans you can repay within 1 year.

    2. If you interest is fixed and low (adjusted for tax deductibility if you can deduct), do you have higher interest loans? If you do – go after them.

    3. Is your interest low enough that you can earn more money on low-risk investments such as a CD or high-yield saving? If so, pay the minimum and put your money on a CD instead. When or if it becomes advantageous to repay, you can always take the money from your savings and send them one large check.

    4. A lot of money is being pumped into economy now. Do you believe this may cause inflation in future or do you believe the government be able to remove these excess money from the circulation before we get high inflation? Do you believe that the government will have to raise rates a lot to do so? Or do you believe we are facing a long deflationary period? If you believe that we will have inflation in future, keep the low interest loan around for as long as possible: the inflation will eventually reduce your payments to nothing. Also, the interest rates that the government will have to raise will mean the banks will be paying a lot more on CDs than you’ll be paying in premiums. If, on the other hand, you believe in a long deflationary period, it makes sense to repay. This is by the way why my rich friends chose to take mortgage instead of pay cash – they strongly believe in future inflation.

    5. Change the way you think. The reason people like Dave Ramsey’s “snowball” method is that they feel a sense of achievement of repaying a small loan. But this method results in wasted money. So, instead of wasting money change your way of thinking. It’s all the same pool of money – your savings and your debts, one is positive and one is negative. Learn to think in a way that maximizes the total. Learn to feel satisfaction in seeing the total increase and the payments you need to allocate every month to your debt decrease.

  17. re: Kitty… Maybe the reason you don’t understand Dave Ramsey’s snowball method is because you’ve never had consumer debt.

  18. @kitty…

    Solid points, I too have thought about using a CD when/if rates go higher than my student loan interest rate.

    However, with the snowball method, I think you misunderstand how psychology plays into the vast majority of people’s finances, particularly anyone who has gone into consumer debt.

    The way I see it, Debt = Risk. If I kept my lower-balance debts around while paying strictly the debt with the lowest interest rate (which for me, would be a student loan on a 30-year payoff), I’d also have to keep around those minimum payments on the smaller balances every month. A higher cumulative monthly minimum payment leaves a smaller margin for error when emergencies arise.

    A similar scenario arises with the 0% interest credit card. Yes, you can shave off money in interest, but your student loan monthly payment does not change, AND you’ve just acquired an additional monthly payment to cover each month.

    Perhaps towards the end of my debt payoff I will re-assess, since then I’ll only have one or two monthly payments a big snowball payment (again, lower cumulative monthly obligations would enable me to take on more risk). But until then, the few dollars potentially lost is worth the extra security of knowing I have snowball money each month in case an emergency happens.

    So while you may pay out a little more in interest, you gain in decreased risk & increased security.

    Congrats kitty on your financial success!