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Find out which student loans to pay off first based on your financial goals and other factors. (Shutterstock)
If you have more than one student loan, you may be wondering which one to pay off first. The answer depends on the type of loan you have, the amount you owe, and your financial situation.
Some borrowers focus on the loan with the highest interest rate first, while others prefer to start with the loan with the lowest balance to pay it off faster. The answer is not the same for everyone, and what works for someone else may not be the right option for you.
Here’s what you need to know about prioritizing your student loan repayment and some strategies you can use to eliminate debt faster.
Refinancing your student loans is one option that could help you pay off your student loans faster. Visit Credible for compare student loan refinance rates from various lenders, all in one place.
Strategy 1: Pay off private student loans first
If you have federal and private student loans, consider repaying your private loans first. Private loans often have higher interest rates than federal loans, so paying them off first could save you money in the long run. Continue to make minimum monthly payments on your federal loans, but put any extra funds available into your private student loans.
Repayment options are somewhat limited with private student loans, and private lenders generally offer less protection than federal student loans. If you have federal student loans, you have access to benefits such as loan deferral and forbearance, as well as loan cancellation programs. Private lenders are less forgiving when borrowers face difficulties or need to make adjustments.
If your credit is good or you have a cosigner with good credit, you can also refinance your private loans for a lower interest rate, which could help you pay them off faster.
Strategy 2: Prioritize the loan with the highest interest rate
If you want to maximize your savings when paying off student loans, start with the one with the highest interest rate. Federal student loans come with fixed rates set by the government. Set of private lenders interest rate depending on your credit and other factors, and they are often higher. Commit to settling your loan with the highest interest rate first.
By paying off the loan with the higher interest rate, you reduce the amount of interest you will pay on the loan beyond the principal balance. This is called the avalanche of debt method, and it’s a good option if you want to pay the least amount of money in the long run.
For example, if you had a $12,000 student loan at 5% interest and you paid it off 10 years, you would pay $3,273 in interest for a total payment of $15,273. If you made enough extra payments to pay off that same loan in seven years, you would only pay $2,247 in interest, a savings of $1,026.
Strategy 3: Repay the smallest loan first
Another refund option you may want to consider is the debt snowball method. This strategy prioritizes paying off the student loan with the lowest balance first.
To do this, make a monthly minimum loan repayments on your other loans and pay any additional money on the one with the lowest balance. Once you’ve paid off that loan, move on to the loan with the lower balance, carrying over the funds you were paying on the previous loan. Continue to repay your loans and defer funds, forming a snowball effect that continues to grow until you have repaid all of your loans.
The debt snowball builds up to larger payments on subsequent loans, and paying off a loan quickly creates a small payoff. This can provide motivation during the payback journey.
Credible, it’s easy to compare student loan refinance rates from multiple lenders in minutes.
What’s the best way to repay your student loans?
It is important to choose the strategy that best suits your income, the amount of student loan debt, and objectives. Here are some tips to consider when choosing the repayment plan that’s right for you:
Take stock of your credits
Before you can figure out the best way to pay off your student loans, you need to take stock of your debt. Write down the details of each loan, including your:
- Lender/manager
- Loan Balance
- Interest rate
- Monthly payment amount
Once you’ve done this, you’ll have a better idea of where you stand and the right way to approach your student debt.
Explore Income Driven Repayment Plans
If you have federal student loans and are currently on the standard 10-year repayment plan, consider switching to an income-contingent (IDR) repayment plan. Since these plans are based on your income and family size, you could significantly reduce your monthly loan payments.
You have four IDR plan options:
- Pay As You Earn Reimbursement Plan (PAYE Plan)
- Revised Pay As You Earn Repayment Plan (REPAYE Plan)
- Income Based Reimbursement Plan (IBR Plan)
- Income Contingent Repayment Plan (ICR Plan)
Keep in mind, however, that an IDR plan will generally extend the time it takes to pay off the loan, which, in turn, means you’ll pay more interest on the loan.
Use a student loan calculator
Calculate the total interest on your student loan with a student loan interest calculator. This will tell you how much interest you’ll pay on your current repayment plan and how much you can save if you pay off your loan sooner or refinance at a lower interest rate.
Which Federal Student Loan Should You Pay Off First?
Another factor to consider is whether your federal student loan is a direct subsidized loan or a direct unsubsidized loan. A direct subsidized loan will only start earning interest after the six-month grace period following graduation or leaving school. The Department of Education pays interest on the loan while you are in school.
With an unsubsidized direct loan, you are responsible for interest charges, which begin to accrue from the time the loan is disbursed. If you don’t pay interest during your studies, the interest accrued during your studies will end up being capitalized, which means that it will be added to the principal of your loan. In other words, you will end up paying interest on your interest.
Because they start accumulating interest first, you generally have to pay off all unsubsidized direct loans before subsidized direct loans.
What to consider when repaying student loans
The type of student loan you have isn’t the only factor you should think about when setting up a repayment plan. Here are a few other things to consider as you progress through paying off your student loans:
Refinance your student loans
Refinance your student loans could help you save money and possibly pay off your loans faster. Many lenders allow you to prequalify without negatively affecting your credit score, so it’s worth prequalifying with a few different lenders to compare rates and terms.
Refinancing can save you a lot of money on interest over the life of your loan and give you one student loan payment to manage. You can refinance private student loans or a mix of private and federal loans. Just keep in mind that when you refinance federal loans to a private loan, you lose access to federal protections like forbearance and income-based repayment plans.
With Credible, you can compare student loan refinance rates from different lenders without affecting your credit.
Dealing with other forms of debt
In some cases, paying off your student loans first may not be the right solution. Student loans tend to have lower interest rates than other forms of debt. If you wear credit card debtyou may want to tackle those bills — which are costing you more interest — before committing additional funds to your student loan debt.
As with most financial decisions, deciding how and when to pay off debt depends on your situation. Consider all the factors to see what makes sense to you.
Avoid overstretching yourself financially
However you choose to repay your student loans, protect yourself by making sure you have enough savings in an emergency fund to cover unexpected expenses that may arise. Create guidelines for yourself on what constitutes an emergency and set aside your emergency savings for those types of expenses. Don’t use emergency funds to pay off student loans or other monthly expenses, if possible.