Which Student Loans Should I Pay Off First?

How to decide which student loan to tackle first

As you decide which student loan to pay off first, consider taking a look at the types of loans you have. If you have private loans, you might consider starting with that debt. On the other hand, some federal student loans have higher interest rates, so you might feel more comfortable tackling those first.

Key Takeaways

  • You likely have several different types of student loans.
  • Federal consolidation can help you streamline your federal student loan repayment.
  • A good repayment strategy fits your needs and personal finance style.
  • If you have a mix of private and federal loans, you might want to tackle them separately.
  • Consider federal student loan relief when making repayment plans.

Student Loan Payments: Factors to Consider

As you consider how to proceed with student loan repayment, there are several important factors to consider.

The Type of Loan You Have

The type of student loans you have can impact how you decide which loan to pay off first. Your first consideration is whether you have federal student loans, private student loans, or a mix of both.

Federal student loans are standardized, and the terms depend on what type of loan you have and when you took it out. Each year, a fixed interest rate is set for each type of federal student loan based on a formula provided by Congress.

Here are some of the federal loan types and their general repayment terms:

  • Direct Unsubsidized: During school and a six-month grace period after leaving it, interest begins accruing on the loan. Any accrued interest is added to the balance of the loan at the end of the grace period.
  • Direct Subsidized: While you’re in school and during the six-month grace period, interest is paid by the federal government. At the end of the grace period, when you begin repayment, you become responsible for the interest.
  • Direct PLUS Loans: These loans begin accruing interest as soon as they are disbursed. There is no grace period on Parent Loan for Undergraduate Students (PLUS) loans, but for graduate and professional students, there is an automatic six-month deferment when you finish school.
  • Direct Consolidation Loans: It’s possible to consolidate all of your federal student loans into a single loan to streamline payments. Once you consolidate your loans, your interest on the new loan starts accruing. Your interest rate will be fixed, and it will be the weighted average of the interest rates on the loans you consolidated. The rate will be rounded up to the nearest one-eighth of 1%. If you are worried about a higher fixed rate, you may choose to only consolidate some of your loans and not others. Depending on your situation, it might also make sense to wait until near the end of the six-month grace period before consolidating loans.

Private student loans have different repayment terms and interest rates, depending on your lender. If you have multiple private loans, it’s also possible to refinance them into one loan. With refinancing, you replace multiple smaller loans with one bigger loan. This simplifies your private loan payments, similar to how loan consolidation can help with your federal student debt.

Your Interest Rates

Next, pay attention to the interest rates you have:

  • Federal loans have fixed rates, but each rate can be different based on the year when it was disbursed.
  • Private loans can have fixed or variable rates. Fixed rates remain the same throughout the life of the repayment, while variable rates can change with market conditions.

Fixed rates offer a reliable payment that can fit into your budget. If you have a loan with a variable payment, it may make more sense to start with that debt before rates begin increasing. Alternatively, it might be better to refinance to a loan with a fixed rate if possible.

Another option is to start with the loan that has the highest interest rate. By paying down the loan with the highest interest rate, you have a better chance to get rid of the most expensive debt first so that overall interest accrues at a slower rate.

The Debt You Have

Before deciding which student loan to pay off first, don’t forget to consider other types of debt you have. For example, starting with high-interest credit card debt might make more sense before aggressively tackling your student loans.

High-interest credit card debt can lead to higher overall interest charges. Paying off your credit cards first could save you money in the long run. Additionally, paying down your credit card debt can help boost your credit score.

Pay attention to your other types of debt and how these accounts might impact your ability to meet other financial goals. In some cases, it might make more sense to put money toward paying down other types of high-interest debt while making the minimum monthly payment on your student loans. Once your other debt is paid off, you can decide whether to start with federal or private student loans.

Repayment Options

Depending on your income, you might have access to income-driven repayment (IDR) options with your federal loans, limiting your minimum monthly payment to a percentage of your income. Private loans don’t typically offer IDR options, so you might see if you can secure a lower payment on your federal loans while you tackle your private loans.

Another consideration is term length. Longer term lengths, which are typically part of IDR plans as well as direct consolidation loans, generally lead to a lower monthly payments. However, the longer your term, the more interest you might accrue. You could pay more in the long run if you choose a longer repayment term and don’t pay off your debt early.

An IDR plan may qualify for forgiveness, but a standard consolidation plan may not. Be sure to check before switching to a different repayment plan. Also, consolidation may not be right for everyone; it’ll depend on your situation.

Strategies to Pay Off Your Student Loans

As you create a student loan repayment plan, different strategies can provide you with the means to get rid of your debt faster. Choose a strategy that works best for your circumstances and that you’re more likely to stick with.

Here are three strategies to consider:

Pay Off Private Student Loans First

One approach is to start with paying down your private student loans. Private loans are not eligible for forgiveness through the government. If you have private and federal loans, your federal loans may be eligible for federal student loan forgiveness depending on your occupation and other factors. For example, if you work for a qualifying nonprofit, it might make more sense to get on an IDR plan and apply for Public Service Loan Forgiveness (PSLF) after making 120 qualifying payments.

While you make consistent payments on your federal loans, you could work on more aggressively paying down your private student loans, which aren’t eligible for federal loan forgiveness.

Just remember: Some consolidation plans do not qualify for PSLF. IDR plans will keep your payments qualified and counted toward the 120 required payments for PSLF. Be sure to ask about PSLF before consolidating your federal loans.

Some IDR plans offer automatic cancellation after 20 or 25 years. If you’re on the plan for long enough, even if you don’t qualify for PSLF, your remaining balance might be forgiven.

Pay Off High-Interest Loans First

Another effective strategy is the debt avalanche. With this approach, you pay off your loans from the highest interest rate to the lowest. You make the minimum payments on each balance, with the exception of the highest-rate loan. Make an extra monthly payment based on how much you can put toward the debt.

For example, if you have $200 extra to put toward debt reduction and your highest-interest balance has a minimum payment of $500, you put $700 toward that debt. Once that high-interest debt is paid off, you put the entire amount of the former payment toward the next debt on your list.

Starting with high-interest loans minimizes the interest you pay in the long run, since the higher rates accumulate interest charges faster.

Pay Off Small Loans First

Instead of starting with high-interest loans, you can follow a similar strategy but order your loans from smallest balance to the largest. This method allows you to get a quick “win” by paying off the smallest loan and offering you the satisfaction of reaching a milestone.

You might pay a little more interest in the long run, but for some borrowers, the regular wins early on make it easier to stay motivated to keep paying down debt.

Is it a good idea to pay off your student loan early?

If you’re concerned with how much you’ll be paying in interest in the long run, and you want to be debt-free faster, it can be a good idea to pay off your student loans early.

I have two loans with the same interest rate. Which one should I pay first?

If you have two debts with the same interest rate, starting with the smaller balance can help you meet a milestone quicker and be a motivator to keep going. On the other hand, if you start with a higher balance, you might save a little bit more on interest.

Should I apply for student loan forgiveness?

As long as you don’t submit any false information, there’s no harm in applying for student loan forgiveness. If you qualify, you could potentially get rid of your balance (or at least a portion of it) much faster. This might allow you to work toward other financial goals you have once you’re debt-free.

Which student loans should you pay first: subsidized or unsubsidized?

It’s a good idea to start paying back unsubsidized student loans first, since you’re more likely to have a higher balance that accrues interest much faster. Once your grace period is over, even subsidized loans will start accruing interest. However, because those balances are typically lower, the interest shouldn’t add up as quickly.

Is it better to pay off interest or principal on student loans?

In general, it’s better to put extra payments toward the loan’s principal. When making more than the minimum payment, you might need to specify that you want the additional amount to go toward the principal to reduce the amount you owe.

The Bottom Line

In the end, the best method is the one that helps you work toward your other financial goals as you pay down your student loans as quickly as possible.

As you decide which student loan to pay off first, keep in mind the types of loans you have, their interest rates, and whether they might be eligible for forgiveness. Also consider consolidating and/or refinancing your loans to streamline the repayment process and provide you with a faster way to get rid of your student loan debt.

Article Sources
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