Paying Off Debt: Debt Snowball or Some Hybrid?



One of  my great readers commented after reading my post, Our Debt Paydown Plan, with a few thoughts of his own:

My wife and I are also a dual-physician couple finishing our 4th year in practice. Starting to plan for a family so will look forward to your future posts on how you operate your household. We also practice in Canada – so marginally reduced student loan sizes, a whole different series of retirement account acronyms as well as the benefits of incorporating a small business for planning, although likely disappearing this year.

You state you have adopted a “modified snowball” debt repayment strategy. I recognize this is based upon the positive psychology of getting loans off the balance sheet as rapidly as possible, math be damned. But when I look at your repayment priority it appears to be: student loan A, car loan, student loan B then Mortgage.

A pure snowball would be: car loan–>A–>B–>mortgage and the “avalanche” method, paying highest interest first, would be B–>mortgage–>car–>A.

Just asking for a little more rationale for the approach you have taken. Combined you have stable and excellent income, focused goals, realistic lifestyle expectations, a long runway to retirement and are through the high impact maternity/paternity years – you’ve won at each of these but I don’t follow your strategic decisions for this plan specifically.

My takes:
1. You have committed yourself to debt repayment as a priority (versus accelerated retirement savings) for the better part of the next 10 years. Many would argue that you’d be ahead by accumulating savings and subsequent investment income versus the relatively low interest rates you’re paying down. And now you’re paying your cheapest loan first.
2. Usually debt snowball is setup for individuals with a lot of small loans – so in a series of months the number of loans on your balance sheet grows smaller. You’re a couple years away from the first being removed from yours – and the relief from its final payment a lot of nights and weekends on call away. Do the same benefits apply?
3. Are there specific requirements of your loan refinancing that force you above the minimum payment for some loans versus the others?

I don’t me to challenge you significantly but on the surface it appears that you’re less likely to achieve the benefits of snowball at the expense of paying more over time.

I really enjoyed this comment and I thought the best way to address some of the issues raised was to go through point by point and discuss our rationale for doing what we are doing. First, as a refresher here is our current breakdown of our debt:

It’s not all bad. The good news is that it will all be paid off by my 40th birthday (if all goes according to plan):

So, let’s break this thing down.

You state you have adopted a “modified snowball” debt repayment strategy. I recognize this is based upon the positive psychology of getting loans off the balance sheet as rapidly as possible, math be damned. But when I look at your repayment priority it appears to be: student loan A, car loan, student loan B then Mortgage.

A pure snowball would be: car loan–>A–>B–>mortgage and the “avalanche” method, paying highest interest first, would be B–>mortgage–>car–>A.

Just asking for a little more rationale for the approach you have taken. Combined you have stable and excellent income, focused goals, realistic lifestyle expectations, a long runway to retirement and are through the high impact maternity/paternity years – you’ve won at each of these but I don’t follow your strategic decisions for this plan specifically.

Fair enough. There are some mitigating factors that I didn’t discuss in the original post that lead us to our current strategy of aggressively paying down my wife’s student loans. For cash flow (and psychological/behavioral) purposes we decided when we refinanced our student loans to focus the majority of our capital to one of the two student loans versus equally splitting our money between both loans. Since we were planning on aggressively paying off my wife’s student loans, we felt comfortable taking the gamble and refinancing her loans into a five year term variable rate loan (refinanced through Sofi). We only felt comfortable doing this because we had no intention of taking the full five years to pay off these loans – and therefore the risk of the variable rate increasing dramatically enough to seriously hurt us was low enough we were comfortable proceeding. We then refinanced my student loans (also through Sofi) into a 20 year fixed rate loan, which allowed us to have as much extra money available as possible to pay toward her student loan principal.

Since we budgeted about $12,350 per month to student loan repayment essentially our options came down to the following (rough numbers/even numbers used because I don’t remember the exact details!):

Option A:

Student Loan A: $400,000, rate 4% (fixed) 10 year: $4,049/mo. Additional principal payments of $2,126/mo. Loan paid off 6 years, 2 months from origination date.

Student Loan B: $400,000, rate 4% (fixed) 10 year: $4,049/mo. Additional principal payments of $2,126/mo. Loan paid off 6 years, 2 months from origination date.

Option B:

Student Loan A: $400,000, rate 2.6% (variable) 5 year: $7,116/mo. Additional principal payments of $2,539/mo. Loan paid off 3 years, 8 months from origination date.

Student Loan B: $400,000, rate 5.25% (fixed) 20 year: $2,695/mo. $355,380 principal left upon payoff of Student Loan A. Then refinanced to 5 year variable loan at 2.6%. Loan paid off 6 years, 2 months.

So the interesting thing to note here is that the month that we definitively pay off all of our student loans is the same regardless of which option we pick. What we gain by picking option B (and why we went this route) is: 1. The psychological benefit of more quickly paying off one of the two loans (on target for two years from today). 2. Once my wife’s student loan is paid off our mandatory minimum payments decrease dramatically. Even though we intend to snowball her student loan payment into mine, we are both looking forward to the day when our mandatory minimum loan payments are not $12,000/month. This may allow my wife to go part time sooner. Of course, should the variable rate offered increase dramatically over the next 6 years we may pay slightly more in interest and extend our payoff by a month or two.

While we would love to pay off the car first (we could do so in about seven months if we paid the minimum on everything else in the meantime, or right now if we emptied out a chunk of our emergency fund), we’d rather eliminate the loan with the variable interest rate and decrease our mandatory minimum loan payment. The auto loan will be paid off in the month after my wife’s student loan is wiped out. Then the focus turns to my student loan, and then the mortgage (probably, see below).

1. You have committed yourself to debt repayment as a priority (versus accelerated retirement savings) for the better part of the next 10 years. Many would argue that you’d be ahead by accumulating savings and subsequent investment income versus the relatively low interest rates you’re paying down. And now you’re paying your cheapest loan first.

I am reminded a little of a recent post by the White Coat Investor discussing his decision to pay off his mortgage in spite of the fact he almost certainly could make more investing the money elsewhere. There are clearly psychological benefits to paying down debt that really speak to some of us and not as much to others.

As I mentioned in my original post, we have gone back and forth about what to do with this extra $13,000/month once we only have a mortgage left. Dr. Cory Fawcett makes a compelling argument for paying off your mortgage as soon as possible in this scenario in his book The Doctor’s Guide to Eliminating Debt. Dr. Fawcett makes the argument that being debt-free is empowering and liberating and that the argument supporting carrying a long mortgage for tax benefits or a hedge against inflation is largely overstated. I would tend to agree with him.  

From the point we send in our last student loan payment it will only take us three years to fully pay off our mortgage and be totally debt free – at age 40. As I mentioned in the prior post, since we are very aggressive with our investments (100% equity) due to risk tolerance and our young age/career longevity, I view this equity as being the equivalent to the bond portion of a portfolio. Since we would only be 40 at this point, we would still have a decade or more to aggressively fund our kids’ 529s and our brokerage account. If we decide to go part-time at this point it would be easy to do so given our monthly expenses would now be $17,000 per month less than they previously were.

Essentially the idea of not owing anyone a dollar and still having a decade or more of productive earnings ahead appeals greatly to us even if paying the minimum on the mortgage and investing the difference might result in a slightly greater nest egg at retirement age.

2. Usually debt snowball is setup for individuals with a lot of small loans – so in a series of months the number of loans on your balance sheet grows smaller. You’re a couple years away from the first being removed from yours – and the relief from its final payment a lot of nights and weekends on call away. Do the same benefits apply?

I think they do. I view the debt snowball for us as a safeguard against lifestyle inflation. Currently we allot over $17,000/month of our take home income to debt repayment (along with roughly $8,000/month to retirement savings in various forms). If we continue to maintain that same monthly commitment to debt repayment we will have paid off all of our debt by age 40 and set ourselves up for one or both of us to work part-time at that time and/or to retire by age 50. Of note, once debt free we plan to take that $17,000/month of take home income and invest it fully between 529s/brokerage accounts.

3. Are there specific requirements of your loan refinancing that force you above the minimum payment for some loans versus the others?

Covered above.

Thanks to my readers for following along on our journey. Good luck to you all and please share your stories in the comments section.


3 Replies to “Paying Off Debt: Debt Snowball or Some Hybrid?”

  1. I think in your situation it is not the method that you choose to pay down the debt that matters. It is the attitude of wanting to pay it off early. Once you develop that attitude, you are going to win the game, whatever path you take. But I would still pay off the car first since you could do it so quickly.

    1. Thanks for reading and commenting, Cory. I agree with your comments. I found it really interesting that whichever way we sliced and diced repayment of the two student loans the payoff date basically didn’t change. I think the answer is to continue throwing boatloads of money at the debt (in some order) until it all goes away.

  2. It seems like you are doing a debt snowball not based on loan size (the traditional debt snowball) or interest rate (the “math” way to do it, but in order of “bad debt” to “good debt.” You’ll pay off the car first (“bad debt”), then the student loans (“ok debt”), and finally the mortgage (“good debt”).

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