FIRE: The Froogal Method
How to attack $100,000+ of Federal Student Loans & save THOUSANDS!
Snowball (Ramsey), Avalanche, Consolidation, Forgiveness - all methods that rarely work.
Brief descriptions courtesy of Nerdwallet,
"Snowball: You focus on paying off your smallest debt first (while paying minimums on the others), then roll the amount you had been paying on it into payments on the next largest.
Avalanche: You pay off your debt with the highest interest rate first (while paying minimums on the others), then the next highest rate, and so on. It may save you time and money over the course of your debt payoff.
Debt consolidation: Combine multiple old debts into a single new one, ideally at a lower interest rate, making payments more manageable or the payoff period shorter. There are a few ways to consolidate debt, including balance transfer cards and personal loans."
Forgiveness: You follow federal guidelines for Public Service Loan Forgiveness Program (PSLF) for a 10-year period. This requires an income-driven repayment plan and the program has only a 2% success/approval rate.
Here's the problem with the first 3 (snowball, avalanche/Ramsey, and debt consolidation): unless you are laser-focused and strong-willed, the application of the method only persists for a few months.
To your credit (if you are one of the majority that has tried & failed to maintain the effort), the government/payment servicer's websites do NOT make implementing any of these very easy.
Why? Because if you just so happen to follow & successfully implement any of these methods, you will save tens of thousands of dollars (if not hundreds of thousands) in interest payments compared with just paying the minimum amount for 30-years.
So these agencies/the Federal Government is actually economically incentivized to make paying these loans just annoying enough to deter any of the smart methods of attack.
Example? Most student loan servicers do not let you auto-pay any amount above the minimum payment.
This means you have to manually go in to pay more than the minimum on each loan (which is just annoying enough to keep the non-committed from consistently doing it).
Let's say you're up for the challenge (in theory).
So now every month you need to discern the exact budget amount you can afford to apply to your student debt in excess of your minimum payment.
You will need to create a budget, test the budget, and then deal with the fact the inevitably budgets are only good until you have an expensive month/event/just get tired of filling in your excel spreadsheet.
This is a matter of strong organization and complete discipline.
So doable, but just another thing to worry about on top of the nuisance already created by the loan servicers.
If you can pull this off, you then need to figure out which method you are going to attempt to stick with.
Avalanche is the economically reasonable route but most like the Ramsey/snowball "little wins". At the same time, your financial planner (if you're paying for one) may be telling you to privately consolidate (in which case, you lose all federal protections).
This reduces down really into - avalanche if you have really high-interest rates and have the discipline to go months/years without successfully paying off a loan, snowball if you need the little wins or you'll just quit, and consolidate if you will likely revert back to minimum payments in the end.
You'll likely try one until the monotony required to truly put a dent in your massive pile of debt breaks down your willpower. Then you will either give up (minimum payments) or try googling "can I declare bankruptcy on my loans?". (which you technically can but only if you're 100 years old and have zero ability to make the payments)
Sound like you?
So allow me to introduce the Froogal method - created by someone who lived everything you just read and then built a FinTech to solve the problem.
Froogal front-loads your payment.
So if you were going to pay an extra $500 a month, you will pay $4,500 on day 1 (over 9-months).
This is accomplished by partial refinancing.
Rather than pay 5% to 9% interest on Federal Debt, Froogal provides a marketplace for your partial refinancing.
You enter in your desired amount or desired payment, choose the new lower rate you want (you can try zero but 1%-3% is your better bet for a "match"), and then Froogal matches you with people sitting on cash.
These people are other real people, banks, insurance companies, credit unions, and other financial institutions.
This wide group of people leads to intense competition - which results in the lowest rates possible.
Once matched, the $4,500 is sent right to you and you can use it to attack any student loan of your choice.
So essentially, avalanche/snowball/consolidation is like shooting bullets at your debt while Froogal is like shooting a rocket launcher.
On top of all of this, you are locked into 9-months of discipline.
This eliminates your ability to lose motivation.
How? Froogal secures your partial refinancing with your emergency fund & short-term savings.
Banks care about "character" and other nonsense "C's" - Froogal cares about cash.
What this means is that if you miss a payment - the amount of your required monthly payment will be deducted from your savings (emergency fund).
You can always catch up or frankly just pay entirely with your emergency fund - but it's far easier to just set up an auto-transfer so when the 9-month partial refinancing is over, you have the same amount of savings and can start the entire process again.
So let's say your sitting on $100,000 of student debt and have a $20,000 emergency fund.
You also have about $1,000 of budgeted funds available every month to use to attack your student debt (on top of your minimum payment amount).
You can obtain an immediate partial refinancing of $9,000 at 2% (rate may be a bit more or less depending on the marketplace).
As most of your student loans are likely closer to 8%, this will save you 6% or $405 over the 9-month period in interest payments (on the $9,000 loan).
So you receive $9,000 immediately, apply it to your highest rate student loan, and then set up auto-transfer each month to Froogal for the 9-months (monthly payment will equal = $1,000 + $15 interest (2%)).
If you set up this automated process every 9-months, you will:
Pay off your $100,000 in student debt in approximately 8 years
You will save $4,320 VS. simply paying more on your own (other methods listed above) in the exact same amount over the exact same period of time
Stated differently - the only thing you are doing differently with Froogal is front-loading your payments + obtaining a lower interest rate while you rapidly attack your loans every month.
Those are just the economic outcomes.
You also will be able to eliminate a lot of stress compared with the other methods.
One bit of effort every 9-months far outweighs the budgeting, method hopping, and servicer website navigation involved with the choices above.