Many students leave college with more than one student loan. You may have questions about the best repayment strategy if you have multiple loans.
Is it better to pay more on certain loans to pay them off faster? If so, which loan should you focus on first?
We’ve researched to help you answer these questions and save money on your student loan repayment.
In this guide:
- How to decide which student loan to pay off first
- Are there tools or calculators that can automate the decision for me?
- How do I know if I chose the right student loan to pay off first?
- Do I have to go through this process again after I pay off my first student loan?
- Should I combine my student loans so I only have one to pay back?
How to decide which student loan to pay off first
First, make sure you have all the relevant information for your student loans, including the following:
- Interest rate
- Minimum monthly payment
- Repayment term
- Type of loan
If you have private loans, find out whether your interest rate is fixed or variable. If it’s variable, note how often the rate may increase.
If you have federal loans, note what loan subtype you have:
- Direct Subsidized
- Direct Unsubsidized
- Direct Consolidation
- Direct PLUS
You can access this information on the National Student Loan Data System (NSLDS), which is maintained by the Department of Education.
If you have private loans, this information should be available on your most recent loan statement or the loan servicer’s website.
If you’re unsure who your private loan servicers are, you can find that information on your official credit report. Go to AnnualCreditReport.com to see your report from all three credit bureaus at no cost every 12 months.
While deciding on a student loan repayment strategy, pay the minimum on every loan. You must make the minimum payment unless your loans are in deferment or forbearance. Failing to do so can result in late fees and damage your credit score.
Record crucial information about each student loan
Once you’ve located information on all your student loans, write down important information about each one. Having this information available will make it easier to prioritize.
The list below shows what you should know about your loans.
Private loans or federal
To pay off your loans early, a rule of thumb is to focus on your private loans first. Private loans have fewer repayment and forgiveness options than federal loans. It’s better to pay them off first and then focus on your federal loans.
If you’re eligible for any federal loan forgiveness programs, you may not need to pay off your federal loans ahead of schedule. Keep making minimum payments, and follow any rules necessary to qualify for loan forgiveness.
Subsidized or Unsubsidized
If you have federal loans, figure out whether you have Subsidized or Unsubsidized loans. Knowing the difference between the two can help you figure out which to pay off first.
Subsidized federal student loans do not accrue interest while you’re in school or during periods of deferment. Interest will always accrue on Unsubsidized federal loans, Direct PLUS loans, or Direct Consolidation Loans.
When comparing your student loans, note the type of interest and the interest rate itself. Private student loans may have fixed or variable interest rates. Variable rates may increase or decrease as overall market rates rise or fall.
It’s often best to pay off variable-rate loans first to avoid surprise hikes in your monthly payment. You can also pay off loans with the highest interest rate first.
Total loan balance
Write down the entire loan balance, including the remaining principal and interest. Some borrowers may prefer to pay off smaller loan balances first, so it helps to know how much you have left on a particular loan.
Prioritize your debt
Once you’ve gathered all the required information, the next step is determining whether it makes sense to prioritize private debt over federal debt.
Private loans often have fewer protections and repayment options, as well as higher interest rates. It’s easier to get out of default with federal loans than with private student loans.
When comparing private and federal student loan debt, it’s essential to consider the loan size, interest rate, minimum loan payment, loan term, and the total interest that will accrue.
You might order your loans by interest rate (highest to lowest) or balance. This is crucial to the next step, which is making a repayment plan. Many borrowers pay extra on a loan based on the total balance or interest rate.
Do you want to use your own repayment method or a suggested one?
The next step is to pay off your debt. How you do this is up to you, but two options are the snowball and avalanche debt repayment methods.
Both dictate that borrowers make the minimum payments on all but one loan. However, deciding which loan to prioritize depends on the approach.
Debt snowball method
The debt snowball method says you should pay down the loan with the smallest balance first, regardless of the interest rate.
For example, let’s say you have two loans:
In this case, you would make the minimum payment on Loan 1 while throwing extra funds toward Loan 2.
Research from the Harvard Business Review found the snowball method was more effective than paying off debt equally. The main benefit of this approach is paying off a single debt faster can provide extra motivation.
When the snowball method makes sense: When you need more motivation to pay off your loans.
When the snowball method doesn’t make sense: When you have a higher-balance loan with a much higher interest rate than your other loans.
Debt avalanche method
If your goal is to save the most on total interest, the debt avalanche method may be the right strategy. This method involves paying extra on the loan with the highest interest rate, which will help you avoid accruing unnecessary interest.
For example, let’s say you have two loans:
|Balance||Interest rate||Repayment term|
|Loan 1||$5,000||8%||10 years|
|Loan 2||$10,000||3%||10 years|
Your decision to pay an extra $29 per month on Loan 1 could save about $1,000 in total interest.
Paying off your highest-interest loan first could help you save more than focusing on the loan with the smallest balance. After you pay off the loan with the highest interest rate, take that monthly payment, and apply it to the loan with the next-highest interest rate.
When the avalanche method makes sense: If you have loans with high interest rates and others with low rates.
When it doesn’t make sense: You need more motivation to repay your loans quickly.
Are there tools or calculators that can automate the decision for me?
Borrowers struggling to decide which loan to focus on can use the Unbury.me calculator. To see your results, type in the interest rate, minimum payment, remaining principal, and lender name.
Then add how much extra you can afford to pay each month. You can choose from the avalanche or snowball method to find out which loan you should pay off first.
How do I know if I chose the right student loan to pay off first?
When deciding which loan to pay off first, the best decision is the one that fits your personality and budget. There is no wrong choice.
If you use the snowball method, you may be more motivated to continue the debt payoff journey. If you pick the avalanche method, you may save the most on interest.
The only wrong choice you can make is to stop making the minimum payment on any loan. This will result in extra late fees and damage to your credit score.
Do I have to go through this process again after I pay off my first student loan?
Once you’ve paid off one student loan, you may want to reevaluate which loan to pay off next.
Have your financial goals changed? For example, you might be ready to buy a house and need to save for a down payment. In that case, you can switch back to making minimum payments and put the extra funds toward that goal.
You may also decide to change repayment strategies. For example, the debt snowball method can help you get back on track if you’re feeling unmotivated. Or if you have a student loan with a variable interest rate that has increased, you may consider tackling that one next.
Should I combine my student loans so I only have one to pay back?
To simplify the repayment process, consolidating your loans into one can make it feel more manageable.
Consolidate federal student loans
Borrowers with multiple federal student loans can consolidate them into one Direct Consolidation Loan. This can make you eligible for certain repayment plans and loan forgiveness programs.
The federal government does not have an official refinance program.
The only way to get a lower interest rate on your loans is to refinance with a private lender. However, refinancing will convert federal loans into private loans, rendering you ineligible for the benefits associated with federal loans. Weigh the pros and cons before refinancing.
Consolidate private student loans
If you have private student loans, you can refinance them for a lower interest rate. Some borrowers refinance their loans several times to get a better deal.
If you have both federal and private loans, you can refinance the private loans and not touch the federal loans.