Which student loan should you pay off first?


For many borrowers, student loan repayment is to collect a single loan until the balance reaches zero. But for those with several different loans, things get a little trickier. The best student loan to pay off first might be the one with the highest interest rate, or the one with the least benefits and protections for borrowers; the choice depends on your financial situation and your priorities.



A woman pays bills at a desk


© fizkes / Shutterstock
A woman pays bills at a desk

How to decide which student loan to pay off first

If you have more than one loan, especially a mix of federal and private loans, you will need to create a repayment strategy. Here’s how to decide which student loan to pay off first.

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What types of loans do you have?

Before deciding which student loan to prioritize, determine what type of student loan you have. There are two main types: federal and private. Federal loans come from the federal government and may have been offered when you completed the form Free Application for Federal Student Aid (FAFSA). Private loans are what you borrow from banks, like Citizens Bank Where Discover, or online lenders, like CommonBond Where College Avenue.

Federal student loans include more benefits than private student loans, such as one-year deferment periods, income-based repayment options and loan forgiveness programs. For this reason, it may be a good idea to pay off your private student loans first.

If you have federal student loans, they can be either subsidized or non-subsidized loans. In this case, it’s usually best to focus on your unsubsidized loans first, as they earn interest while you are in school and during your grace period.

Don’t know what type of loan you have? Open your account and see what are the names of the loans. If you see words like “federal”, “subsidized” or “unsubsidized” then you certainly have federal loans. You can also call your loan manager customer service to verify. Some loan companies handle both federal and private loans, so don’t make assumptions about the type of loan you have based on the provider.

What are your interest rates?

Video: Paying Off Your Student Loans with Michael Torpey (CNBC)

Paying off your student loans with Michael Torpey

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If you want to focus on the cheapest way to pay off your debt, take a look at your interest rates to use the debt avalanche method. The Debt Avalanche method requires prioritizing debt repayment with the highest interest rate first. For example, if you have a 10% interest loan and a 7% interest loan, you would pay extra on the 10% interest loan while making minimum payments on the 7% interest loan. interest.

If you have several different loans with varying interest rates, the Debt Avalanche method is usually the fastest way to pay them off, and you’ll pay as little interest as possible. You can also use this method in combination with refinancing – potentially lower the interest rates on your private loans by consolidating them with a private lender.

How much debt do you have?

Another way to approach your repayment strategy is to assess how much you owe on each of your loans and use the debt snowball method give priority to payment. The debt snowball method means that you pay off the debt with the lowest balance first while making minimum payments on the rest. Once that debt is paid off, you move on to the next smaller balance. This creates a snowball effect, hence the name.

While the debt avalanche method usually helps you pay off your loans faster, the debt snowball method works better for some people because of its motivational structure – you should eliminate the first and the last. smaller debt relatively quickly, which can push you forward with each successive loan.

Since the snowball method only focuses on the total balance, you may end up paying more total interest than if you were using the avalanche method. If you don’t want to pay more interest than you need, only use the snowball method when your interest rates are within a percentage point of each other.

Other considerations when repaying student loans

Wanting to pay off student loans quickly is an admirable goal, but it shouldn’t interfere with your other financial goals.

In general, do not use your money emergency fund to pay off your student loans faster. Your emergency fund should be set aside for surprise expenses, like flying for a funeral, taking your pet to the emergency vet, or visiting emergency care. It’s better to stay in debt a little longer than to plunder your emergency fund for a non-urgent expense. If you don’t have an emergency fund, create one before you allocate additional funds to your student loans.

You should also keep in mind any other regular expenses or debts before making any additional payments on your student loans. Student loan interest rates can be relatively low compared to other debt interest rates – if you have a student loan with an interest rate of 5 percent and a credit card with an interest rate of 16 percent interest, you’d better pay your credit card bill in full every month.

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