Approaches for Paying Off Your Student Loans

For many PT students, student loans are a necessary part of achieving educational goals. However, poorly managed debt (including student loans) can become a huge financial burden if the borrower does not fully understand the financial mechanics of the loan and strategically manage their debt. Let's use the following example to demonstrate:

A student gets accepted to a Doctor of Physical Therapy program (congrats!), which costs approximately $90,000 total for the 3 year program. If they take out student loans of $30,000 per year at 6% interest to attend their program, did you know that their loans would accrue over $11,500 in interest by the time they graduate?? That $90,000 loan just became $101,500 - I know, that's daunting.

Accrued interest on big loans is no joke, I know because I'm dealing with it myself! That's why I want to share three strategic approaches that you can use to pay off your student loans efficiently, save money in accrued interest, and most importantly ease your financial stress!

Method 1: The Avalanche Method (Mathematical Method) - Maximize Financial Savings by Targeting the Highest Interest Rates First

The debt avalanche method is mathematically optimized for minimizing your total interest accrued and reducing the overall time spent in debt. Here's how to do it:

• Prioritize Your Loans by Interest Rate -- List your debts by interest rate, from highest to lowest.
• Focus on Paying Off the Loan(s) with the High Interest First -- Make the required minimum payments on all loans EXCEPT the single highest interest loan. Put any additional amount you can into extra payments toward the loan with the highest interest rate.
• This reduces the amount of capitalized interest on your loans and saves you money in the long run.
• Continue the Process -- Once the highest-interest loan is paid off, apply the same strategy to the next highest until all loans are cleared!

The financial benefit to this method is not felt in your wallet while you are paying off the loans, but the savings that can be achieved are enormous!

Method 2: The Snowball Method (Psychological Method) - Maximize Your Sense of Accomplishment by Paying Off Your Smallest Loan(s) First

This method focuses on paying off your debts from smallest to largest, regardless of interest rate. Here’s how it works:

• List Out Your Debts -- Begin by listing out all of your student loans from the smallest balance to the largest.
• Focus on Paying Off Smallest Loan(s) First -- Make required minimum payments on all loans EXCEPT the single smallest loan (lowest balance). Put any additional amount you can into extra payments toward the loan with the lowest balance.
• This method is psychologically rewarding because you can see real progress happening quickly. You get a sense of financial satisfaction seeing "Loan Paid in Full" each time a loan is paid off.
• Once the smallest loan is paid off, take the amount you were paying to the smallest loan and apply it to the next smallest loan on the list. This is called Rollover Payments and is critical to the success of this method. The "Snowball" effect happens as you are able to make larger and larger payments to your larger loans after you clear the smaller ones.

The psychological wins of paying off small debts quickly can provide motivation and momentum (e.g. the Snowball), which are particularly useful for maintaining motivation with clear, tangible progress.

Method 3. Refinancing for Better Terms

If you have multiple student loans or high-interest rates, refinancing could be a smart financial move:

• Lower Interest Rates -- Refinancing can potentially reduce your interest rates, which decreases the amount of money you pay over the life of the loan.
• A word of caution -- Be careful to understand the terms of your loans before you refinance. For example, Federal Loans come with certain borrower protections that Private Loans do not (like deferment options and income-driven repayment plans), and refinancing could nullify those protections. However, if you secure a significantly lower rate, the savings might outweigh these potential drawbacks.
• Simplified Payments -- Consolidating several loans into one refinanced loan means a single monthly payment, often with better terms.

Managing student loans effectively requires a solid strategy and a bit of discipline. Whether you choose the avalanche method for its cost-efficiency, the snowball method for its motivational benefits, or refinancing for better terms, each strategy offers a path toward financial freedom. As a budding PT professional, taking control of your finances early can pave the way for a more secure and prosperous career. You can do this!

Disclaimer: This is not financial advice. Please consult with a financial professional for personalized guidance.