General Goals 1) to be debt free in 3.5 years 2) save lots of money

Sunday, November 14, 2010

Plan of Attack: Student Debt Part 1

When it comes to the 'Plan of attack' there are two distinct camps.

The first camp advises people to list all there debt from smallest amount to largest amount. The systematically work your way through the smallest to the largest. The idea being that if you have small success from the begging you will be more motivated to get all the debt paid down. The second reason for this approach is that the small amounts you paid can then be added to the larger debts to pay down the principle faster.

The second camp advises people to start with the debts which have the highest interest rate. The idea being that the higher the interest rate the less you are able to put into the principle and the more in the end you will end up paying to the lender to get your debt paid off.

Both methods work if you only have CREDIT CARD DEBT!!!

Student debt is very different and requires a different approach.

Not sure what I mean, let me explain. In Ontario, Canada which is were I live OSAP (National Student Loans) gives graduated students 6 months before they have to make their first payment. Interest still collects over those 6 months which is then paid in a lump sum on your first payment. In comparison when you have a student loan from a bank, in my case TD CanadaTrust (TD), the first year you are only expected to pay the interest. After the first year you are expected to play both a chunk of the principle and the monthly interest.

As for payment plan lengths National Student Loans automatically places students on a 9.5 year payment plan. As for my TD loan there is no real payment timeline, basically its when ever the loan is paid off. The thing about this is that you could take 9.5 years to pay off your National Student Loan and 10 years to pay off your Bank loan. However by the time you paid it off at this rate you would have likely paid for the original loan 2 times over. Also it hinders your ability to qualify for a mortgage when you want to buy your first home. For all the above reasons I am going to accelerate my payment plans.

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