Debt Stacking: Learn How It Works and Review the Pros and Cons

Student loans, credit cards, car payments, and even your mortgage can make you feel like you’re struggling with a lot of debt. While regular monthly payments are manageable, you want a plan to get out of debt. Financial advisers offer a range of approaches to paying off your debts, and one of the most popular is debt stacking.

This method of paying off your debts is more popularly called the debt avalanche. It is one approach to prioritizing some debts over others, so you can focus on paying them off quicker. With debt stacking, you rank your most expensive debts, the ones with the highest interest rates, first while paying the minimum on your smaller debts until the larger debt is repaid.

This process works for many people with all kinds of debt. The information below can help you decide if this approach will work for you. 

How to Use Debt Stacking to Pay Off All Your Debts

Debt stacking, or debt avalanche, is a method of accelerating your debt repayment. To use debt stacking, follow these steps:

1. Make a budget. How much money do you make per month? What are your expenses? Make a list of all your monthly payments, from your electricity and phone bills to your credit card and student loan payments. Compare your debts to your income.
   
2. Stop making more debt. Stop using your credit card, do not take out personal loans, and find other ways to avoid small additions to your debts. This will help you focus on the larger debts, like car payments or student loans.
   
3. Make a list of your debts by size. What are your largest loans? Your mortgage, small business, and student loans are likely to be at the top of this list.
   
4. Make a debt list by interest rate. Even lower credit card debts can balloon into much larger amounts due to high interest rates. Look at the interest rate on each loan, and make a list with the largest interest rates first.
   
   For example:
   
   • First credit card: $12,000 balance at 17% APR
   • Second credit card: $1,000 balance with 7% APR
   • Direct unsubsidized undergraduate student loan: $20,500 balance with 4.53% interest rate
   • Direct unsubsidized graduate student loan: $20,000 balance with 6.08% interest rate
     
     With debt stacking, you would focus on the first credit card debt (because it has the highest interest rate), then your second credit card, and then your student loans.
     
5. Ask about lower interest rates. You can consolidate or refinance loans to take advantage of lower interest rates. With federal student loans, you can ask for a direct consolidation loan to merge your debts. With private loans, you can refinance them together to get a lower interest rate.
   
   For tax purposes, a refinanced private student loan may no longer be considered a student loan. It may be considered a personal loan. Even with a lower interest rate, you may not be able to use interest payments as a tax deduction. Weigh the pros and cons before you move forward with this.
   
   Once you either consolidate or refinance your student loans, you can adjust your debt stacking plan based on the new interest rates.
   
6. Make a payment plan. Organizing and understanding your debts will lead you to create a repayment plan using the debt stacking method. With a list of your monthly payments, determine how much money you have left over at the end of the month. Then, pick the highest interest loan and put your remaining monthly balance toward it.
   
   According to the Consumer Financial Protection Bureau (CFPB), you have the right to repay your student loans as fast as you can. You might want to prioritize these loans first, even after refinancing for a lower interest rate, as they are likely some of the biggest debts you have. Paying them in the standard repayment period of 10 years, or faster, will give you some peace of mind.

The Pros and Cons of Debt Stacking

Using the debt stacking method to pay off your debts is mathematically the best approach for most people. Debt stacking considers all your debts based on risk rather than principal size. However, it does not always lead to the same level of happiness as other approaches. 

• Pros: People who benefit from debt stacking or debt avalanche prefer this approach because you save as much money as possible on interest payments. With other approaches, like debt snowballing, you might feel more successful by paying off smaller loans first, but you could end up paying more money over time on interest.
  
  Focusing on higher interest rates with the debt stacking method means you pay off interest faster regardless of the size of the loan. You can save hundreds or thousands of dollars through this method. Since credit cards and car payments tend to have higher interest rates than student loans, you can continue to use student loan interest payments as a tax write-off, which can save you even more money.
  
• Cons: With debt snowballing, you pay off debts faster because you focus on the smaller ones first, which can lead to a sense of accomplishment. In comparison, the debt stacking method means you focus on grinding away at the larger debts, so you may not feel rewarded after each payment.
  
  It could take longer to pay off larger debts with higher interest. When you do pay off those loans, more of your money will be freed up, so you can pay down your debt with the next highest interest rate.

Repaying Loans Through Debt Stacking Is Mathematically the Best Approach

If you are the kind of person who works well with a long-term plan and does not need the immediate jolt of positive reinforcement that a debt snowball approach gives, debt stacking works very well.

You can get some positive reinforcement when you make a budget for yourself and see how much money you have remaining at the end of the month after you have made all the basic monthly payments on your debts. Any additional money remaining goes toward high-interest debt, so you know that you are paying down the riskiest debts you have until you are free from them. Even though this does not eliminate small debt very fast, it is an approach that can make you feel satisfied long term, as you watch the amount of your debt reduce.

Focusing on debt stacking also means you can be honest about your student loan payments. Many people feel that monthly payments leave them floundering for cash. Looking at each debt you have and comparing interest rates, repayment plans, and installments means that you can see if you need help with your student loans.

Consolidation and refinancing, deferment or forbearance, and federal loan forgiveness programs are all methods of managing student loans. Other types of loans don’t offer so many options for repayment, so take advantage of these opportunities while paying down other debts.