Which Student Loan Should You Pay Off First?

Which Student Loan Should You Pay Off First?
Written by Publishing Team

For many borrowers, paying off a student loan is about picking at one loan until the balance reaches zero. But for those with multiple different loans, things get more complicated. The best student loan to be paid off first could be the one with the highest interest rate, or it could be the one with the least benefits and protection for the borrower; The choice is up to your financial situation and your priorities.

How to decide which student loan to pay off first

If you have multiple loans, especially a mixture 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.

What types of loans do you have?

Before you decide which student loan you should prioritize, find out what type of student loans you have. There are two main types: federal and private. Federal loans come from the federal government and may be provided when you fill out the Free Application for Federal Student Aid (FAFSA). Private loans are what you borrow from banks, such as Citizens Bank or Discover, or online lenders, such as CommonBond or College Ave.

Federal student loans include benefits over private student loans, such as one-year deferral periods, income-based repayment options, and loan forgiveness programs. For this reason, it may be smart to pay off private student loans first.

If you have federal student loans, they may be either subsidized or unsubsidized loans. In this case, it is usually best to focus on your unsubsidized loans first, as they are accrued in interest during school and during the grace period.

Not sure what kind of loan you have? Withdraw your account and see what the names of the loans are. If you see words like “federal,” “subsidized,” or “unsubsidised,” then you are definitely getting federal loans. You can also contact the customer service department of the loan service for verification. Some loan companies serve both federal and private loans, so don’t assume the type of loan you have based on the provider.

What are your interest rates?

If you want to focus on the cheapest way to pay off your debt, check your interest rates to use the debt avalanche method. The debt avalanche method dictates that you should prioritize paying off debt with the highest interest rate first. For example, if you have one loan at 10 percent and one loan at 7 percent, you will pay an additional amount on the 10 percent loan with minimum installments on the 7 percent loan.

If you have many different loans with varying interest rates, the debt avalanche method is usually the quickest way to pay them off, and you will pay the lowest possible interest. You can also use this method with refinancing – potentially lowering the interest rates on your own loans by combining 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 to prioritize payment. The debt snowball method means that you pay off the debt with the lowest balance first while making the minimum payments on the rest. Once that debt is paid off, you move to the next smallest 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 best for some individuals because of its incentive structure — you have to get rid of your first and smallest debt relatively quickly, which can push you forward on each successive loan.

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

Other Considerations When Paying Off Student Loans

Wanting to pay off student loans quickly is a great goal, but it shouldn’t conflict with your other financial goals.

In general, don’t use money from your emergency fund to pay off student loans faster. Your emergency fund should be set aside to cover sudden expenses, such as traveling to a funeral, taking your pet to an emergency vet, or an urgent care visit. It’s better to stay in debt for a little longer than raid your emergency fund for non-emergency expenses. If you don’t have an emergency fund, create one before allocating extra money for your student loans.

You should also consider any other regular expenses or debts before making additional payments on your student loans. Student loan interest rates can be relatively low compared to other debt rates — if you have a student loan with a 5 percent interest rate and a credit card with a 16 percent interest rate, it’s best to pay your credit card bill at full each month.

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