How do I pay off my student loans?

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In this episode, Adam Nash answers the different ways people pay off their student loans and which is the most effective. Since 2017, Adam Nash has taught “Personal Finance for Engineers” at Stanford. He's covered topics from compensation, investing, to real estate. He’s the Former President and CEO of Wealthfront, Former Vice President of Product & Growth of Dropbox, and on the Board of Directors at Acorns. He’s currently the CEO and co-founder of Daffy, a not-for-profit community built around a new, modern platform for giving.

Today's question is about student loans, and if you have multiple student loans, what's the most effective way to pay them off? If you look online, you'll see that people basically take three approaches, but there's only one that I recommend to my students.

The first method that people use is just a peanut butter approach.

They take however much money they can afford to put towards their loans each month, and they divide it equally across the loans.

Now, the reason this isn't the right answer is because loans tend to have different interest rates and different terms.

And so as a result, putting an even amount of money against each loan means you'll be paying that high interest loan longer.

The second method that you'll hear about is called the snowball method.

In this system, you pay the minimums on each of your loans, but take the smallest loan and direct all your extra money towards paying that one off as quickly as possible.

Once you pay off the smallest loan, you move to the next smallest and then the next smallest.

The advantage of the snowball method is that it's very emotionally satisfying to actually see loans disappear.

And once a loan disappears, the payment that goes along with it disappears, so you feel like you have more money and more momentum towards paying off your debt.

And while this is a very good solution for most people, it turns out to be not mathematically correct in terms of paying the least amount of interest on your loans over time.

The third way to pay off your loans and the one that ensures that you pay the least interest is to pay the minimums on all your loans, except the one that has the highest interest rate and direct all your extra money to paying off that loan first.

That way, it ensures that you have the least amount in the most expensive loan for the least amount of time, resulting in you paying less interest over the entirety of your loan period.

So if you have a number of student loans to pay off, remember you can pay them off a lot of different ways.

But if you pay off the most expensive one first, you'll end up financially better off.

Please note that the information contained on this page is for educational purposes only and should not be considered tax advice. Any calculations are intended to be illustrative and do not reflect all of the potential complexities of individual tax returns. To assess your specific tax situation, please consult with a tax professional.

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