Solid points, I too have thought about using a CD when/if rates go higher than my student loan interest rate.

However, with the snowball method, I think you misunderstand how psychology plays into the vast majority of people’s finances, particularly anyone who has gone into consumer debt.

The way I see it, Debt = Risk. If I kept my lower-balance debts around while paying strictly the debt with the lowest interest rate (which for me, would be a student loan on a 30-year payoff), I’d also have to keep around those minimum payments on the smaller balances every month. A higher cumulative monthly minimum payment leaves a smaller margin for error when emergencies arise.

A similar scenario arises with the 0% interest credit card. Yes, you can shave off money in interest, but your student loan monthly payment does not change, AND you’ve just acquired an additional monthly payment to cover each month.

Perhaps towards the end of my debt payoff I will re-assess, since then I’ll only have one or two monthly payments a big snowball payment (again, lower cumulative monthly obligations would enable me to take on more risk). But until then, the few dollars potentially lost is worth the extra security of knowing I have snowball money each month in case an emergency happens.

So while you may pay out a little more in interest, you gain in decreased risk & increased security.

Congrats kitty on your financial success!

There are a number of issues to consider with student loans.
1. Student loans cannot be dismissed in bankruptcy, so if they are at high interest or variable rate or if there is any issue of being unable to pay the premiums (e.g. loss of job), then they should be higher priority. If your interest rate is high, you may consider taking advantage of 0% credit cards offers if you have access to those. This is a bit risky since you’ll only have a small window to repay the loan before the interest rates go up: you may be able to get another card and transfer balance but in current economy these offers my dry up. So this method – transferring balance to 0% – may be more useful for loans you can repay within 1 year.

2. If you interest is fixed and low (adjusted for tax deductibility if you can deduct), do you have higher interest loans? If you do – go after them.

3. Is your interest low enough that you can earn more money on low-risk investments such as a CD or high-yield saving? If so, pay the minimum and put your money on a CD instead. When or if it becomes advantageous to repay, you can always take the money from your savings and send them one large check.

4. A lot of money is being pumped into economy now. Do you believe this may cause inflation in future or do you believe the government be able to remove these excess money from the circulation before we get high inflation? Do you believe that the government will have to raise rates a lot to do so? Or do you believe we are facing a long deflationary period? If you believe that we will have inflation in future, keep the low interest loan around for as long as possible: the inflation will eventually reduce your payments to nothing. Also, the interest rates that the government will have to raise will mean the banks will be paying a lot more on CDs than you’ll be paying in premiums. If, on the other hand, you believe in a long deflationary period, it makes sense to repay. This is by the way why my rich friends chose to take mortgage instead of pay cash – they strongly believe in future inflation.

5. Change the way you think. The reason people like Dave Ramsey’s “snowball” method is that they feel a sense of achievement of repaying a small loan. But this method results in wasted money. So, instead of wasting money change your way of thinking. It’s all the same pool of money – your savings and your debts, one is positive and one is negative. Learn to think in a way that maximizes the total. Learn to feel satisfaction in seeing the total increase and the payments you need to allocate every month to your debt decrease.

In fact, I would say the mortgage offers less risk, because you can always sell the house (if the worst-case financial scenario happens). You can do nothing to get out of the student loan. You can’t sell your degree and pay the balance on the student loan.