Which Student Loans to Pay Off First
Prioritizing your student loan repayment and figuring out which student loans to pay off first can help you decrease the total cost of your debt. You should make sure you make the minimum payments on all of your student loans each month, then prioritize the loans with the highest interest rate.
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Whether it’s several semesters at the same school, an undergrad and grad degree, or a delicate balance between private and federal student loans, many student borrowers leave college with more than one loan.
Theoretically, paying off a single loan is simple, but what if you have multiple? Should you just make the minimum monthly payments required for each? Or is it more beneficial to pay more on certain loans in an effort to pay them off first? If so, which student loan should you pay off first?
This guide can help you answer these questions and add some much-needed debt prioritization to help you save money your student loan repayment.
How to Decide Which Student Loan to Pay Off First
The following steps can help you determine which student loan deserves priority during repayment.
1) Make Sure That You Are Making the Minimum Payment on All Loans
Before you can prioritize your student debt, you need to evaluate all your existing debts – including other types of loans, credit card debt, and other financial obligations – to make sure that you are and can continue to make the required minimum payments.
By evaluating your existing debt and ensuring you are making the minimum payment requirements, you can begin to etch out a budget to find out how much extra money you can dedicate to a specific loan or set of loans.
Additionally, paying the minimum due will keep your debts in good standing, which will help you maintain or reach a good credit score and access lower rates on future loans, including any efforts towards student loan refinancing.
2) Check to See if Any of Your Debt is Protected
Some student loan debt is “protected” and therefore does not accrue interest until certain requirements are met or a specific amount of time has passed.
For example, subsidized federal student loans do not accrue interest while you are in school or during periods of deferment. Similarly, other loans may be tied to income protection and therefore will not accrue interest until you’re employed.
If you’re trying to prioritize your loan repayment, check with your student loan servicer(s) to determine if your loans are currently accruing interest, and if not, find out if, when, and how much interest will accrue.
3) Check to See if Any of Your Loans Have Prepayment Penalties
If you have private or federal student loans, then you won’t have to worry about prepayment penalties as the Higher Education Opportunity Act (HEOA) of 2008 made it illegal for private lenders to penalize borrowers for prepayment.
However, if you’re including education-related personal loans or if you’ve consolidated student debt with other eligible loans through a personal loan and you’re including this in your debt prioritization plans, then you may be on the hook for prepayment penalties.
Check your loan agreement or consult the lender to determine if this is an issue.
4) Collect the Most Recent Balance and Interest Rate of Each Loan
Assuming you didn’t come across any red flags while completing the steps above, some of which could set limits on how you prioritize your debt, the next thing you should do is gather and record relevant loan information, specifically the outstanding balance and interest rate of each loan.
Though you certainly can complete this step earlier in the process, it’s impossible to move forward without this information. If you have federal loans, 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 on the loan servicer’s website when logged in under your user name.
5) Usually, Prioritize Private Debt Over Federal Debt
Once you’ve gathered all the required information, the next step is to determine if it makes sense to prioritize private debt over your federal debt. In many cases, private debt carries fewer protections and repayment options, and higher interest rates. Furthermore, defaulting on private student loans may potentially result in significantly worse legal and financial consequences.
For that reason, it is recommended to prioritize paying off your private student loans. However, keep in mind that this is not a universal truth, and each borrower must work within the bounds of their unique circumstances. For example, if you were able to secure a lower interest rate on your private student loans than you were on your federal student loans, it may make sense to pay off your federal student loans first.
When comparing private and federal student loan debt, it’s important to consider the loan size, interest rate, minimum loan payment, loan term, and the total amount of interest that will accrue should you continue to follow your existing repayment plan.
6) Compare the Debt Snowball and Debt Avalanche Methods
Assuming there are no notable reasons why you should repay one debt over another, or if you only have one type of student loan debt—federal or private—choosing between the snowball and avalanche debt repayment methods can help you develop a reasonable and effective strategy.
Both methods dictate that borrowers make the minimum payments on all but one loan; however, which loan you choose depends on the selected approach.
Debt Snowball Method
The debt snowball method suggests that you pay down the loan with the smallest balance first, regardless of the interest rate.
Unfortunately, the main benefit of this approach is that you pay off a single debt quicker, and though that may feel good, it doesn’t necessarily result in the biggest savings.
However, if you thrive on tangible motivation and think the quick outcome of this approach will keep you engaged in your efforts, then it can certainly serve as a great place to start.
Debt Avalanche Method
If your goal is to save the most money and decrease your total debt faster, then you may find the debt avalanche method to be the better debt prioritization strategy. To employ this method, you increase your student loan payments on the highest interest rate loan.
This method was created with the notion that a higher interest rate will cause the loan balance to increase at a much faster rate, therefore costing you more over the life of the loan. Conversely, choosing to pay extra on that loan will prevent you from accruing unnecessary interest and will likely help you pay off the loan faster.
For example, if you have a $5,000 loan with a high interest rate of 8% and a ten-year term, you will pay $2,280 in interest over the life of the loan. However, if you pay extra and as a result pay off that same loan in only five years, the interest paid drops to $1,083.
Paying off your highest interest loan first will help you save much more than if you focus on a loan with a lower rate or your smallest loan.
At times, it may seem like you don’t have control over your loans, particularly if you’re currently paying the minimum monthly payment and aren’t making much of a dent in your total balance; however, by prioritizing the right student loan, you can save money and potentially pay off your student loans faster.
Author: Jennifer Lobb