Student Loan Repayment: Dave Ramsey or High Interest Rate?

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  • Student Loan Repayment: Dave Ramsey or High Interest Rate?
Author: Joseph Reinke, CFA

Many Young Professionals that use FitBUX’s financial planning technology have asked us about implementing Dave Ramsey’s Snowball Method for repaying debt.

This article details what your debt repayment options are, reviews the cost tradeoff of these strategies, what not to do regardless of your choice, and which method is the best one to use.

Dave Ramsey’s Snowball Method vs. High Interest Rate First

Dave Ramsey’s Baby Steps have become popular.

His method of repaying debt involves repaying the lowest balance loan first.  This works because it helps build discipline and reduces how much you owe on a monthly basis.

For example, if you have credit card debt of $2,000 and a monthly payment of $30 as well as a car loan for $15,000 with a payment of $250, then paying of the credit card first would reduce how much you owe on a monthly basis by $30 and you can pay this off much quicker than the $15,000 car loan.

The high interest rate method involves paying off the highest interest rate loan first regardless of the loan balance. This method will always save you more money in the long-run relative to Dave Ramsey’s Snowball Method.  Does this mean his method is bad?

No!  I will explore this later in the article but first let’s see an example of how much you would save using the high interest rate method to repay your student loans.

Also, I want to make sure to note that this doesn’t apply to those seeking student loan forgiveness via income-based repayment plans.

Student Loan Repayment Example

The following is an actual example of a physical therapist’s student loan repayment plan from a Member of FitBUX that wanted to compare what he referred to as Dave Ramsey’s method vs paying off the highest interest loan first.  This individual had a total student loan amount of $146,000 and ten loans.

The following are the details for each loan: Loan 1: $1,696 at 5.00% Loan 2: $3,082 at 5.75% Loan 3: $3,950 at 5.35% Loan 4: $4,744 at 3.15% Loan 5: $4,786 at 4.25% Loan 6: $11,853 at 4.00% Loan 7: $19,212 at 5.96% Loan 8: $19,920 at 5.16% Loan 9: $31,963 at 8.25% Loan 10: $45,145 at 6.55%

Assuming a ten year repayment plan and a $200 monthly prepayment, this individual would save over $6,500 more by paying off the high interest rate loans first relative to Dave Ramsey’s Snowball Method.

This always holds true!  There are two factors that determine how much more you’ll save:

1) The spread in interest rates. In this example, the lowest interest rate is 3.15% and the highest is 8.25%. The greater the spread (i.e. the difference between the highest and lowest rates) the more you save.

2) Which loan balances have the higher interest rates? If your largest loans have the highest rates, as is the case in this example, the more you save by paying of your high interest rate loans first.

If you’d like to see how much you’d save, you can enter your loans by becoming a free Member at, building your profile, then using our new financial planning technology to see how much more money you’d have in the long run. 

What Not To Do Regardless Of The Method You Choose

If you stay in your Federal student loans, you absolutely do not want to consolidate your student loans. If you do then you can not do Dave Ramsey’s method or the high interest rate method because you no longer have multiple loans.

Therefore, if you consolidate into one Federal consolidated loan you will cost yourself dearly regardless of the choice you choose.  This is one of the 4 things to know about student loan consolidation.

So when do you consolidate?  If you choose to refinance your student loans, then you may want to consolidate.

We highly recommend working with FitBUX to customize your repayment strategy so you can see if refinancing is right for your situation.  To learn more about refinancing, check out our free student loan refinance service.

Which Method Is Best

Many financial “experts” don’t like Dave Ramsey and say don’t follow his advice.  However, you shouldn’t listen to them either.

The answer to this question is whichever one you are going to follow.  If you are looking to build discipline and want to feel the accomplishment of paying off your loans then Dave Ramsey’s method is great.

If you have good discipline already and want to save as much money as you can you’d want to choose the high interest rate method. The bottom line is whichever you feel the most comfortable following, DO IT!

There is no reason to do either of the methods just because someone told you to if after a few months you are going to stop doing it.

A good strategy is one you are comfortable with because that means you will do it and that is the most important thing you can do when putting yourself on a good financial path…..

By Joseph Reinke, CFA, CEO of FitBUX

Joseph Reinke, CFA

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About the Author

Joseph Reinke is a Chartered Financial Analyst (CFA) Charter Holder and founder of FitBUX which has helped over 14,000 young professionals on their journey to financial freedom. Joseph has been personally investing since he was 12 years old.

In addition, he has experience in student loans, mortgages, wealth management, investment banking, valuation, stock trading, and option trading. He has been on 100s of podcast and has been invited to 100s of universities to discuss financial planning with their soon to be graduates.

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