Sometimes it’s easy to accumulate several loans until you reach a point where your debt is high, and you want to know which student loans to pay off first. The answer depends on your loan type, the amount of debt, and your current financial situation.
For most borrowers, paying off student loans is just making the minimum payment on a single one for the entire stretch of the original repayment plan. However, the picture is different for those who accumulate multiple loans, and things get a little complicated.
If you are one of those who accumulate student loans, you must be feeling pressure on how to prioritize payments. The best thing to do is make a payment plan to help you eliminate debt faster. Some strategies will clear your doubts and lower the stress that a larger amount generates on your finances.
Pay your student loan according to your financial situation
Some people focus on the loan with the highest interest rate; others prefer to get out of the loan with the lowest balance to pay it off quickly. But really, which student loans to pay off first? It’s a bit complex, as what works for some may be different for others.
Before prioritizing a student loan payment, you must evaluate the alternatives, the type of debt, and how it impacts your current finances. Detail which loan has the least benefits and protections for the borrower. The decision comes down to your financial situation and present possibilities.
By having different loans, and especially a combination of federal and private loans, you need to create a repayment strategy. Some tactics can help you work through any inconvenience, as long as you make an assessment focused on your reality.
Pay off private student loans first
Private loans often have higher interest rates than federal loans, so paying them off first will save you money in the long run. You can still make minimum payments on federal loans but allocate additional funds to private student loans.
Student loan repayment options are limited; private lenders offer less protection than federal student loans.
Federal loans can access benefits such as deferment and loan forbearance. Lenders are less forgiving when borrowers need to make adjustments.
Put the loan with the highest interest rate first
A good option for saving when paying off student loans is to start with the debt that accrues the highest interest rate. In the case of federal loans, they come with a fixed interest rate set by the government.
On the other hand, private lenders set interest rates based on credit and other aspects, so they tend to be higher. In that sense, it establishes a greater payment responsibility with those debts with higher interest rates.
This method is known as debt avalanche because by ending the loan with a higher rate, you reduce the interest you will pay on the loan beyond the principal balance. It’s a good option if you want to spend less money over the long term.
Pay off the smaller loan
The method known as debt snowballing is one of the strategies you can use to send one of your student loans. It involves putting the student loan payment with the lowest balance first.
Make minimum monthly payments on all of your loans and inject the extra money into the one with the lowest balance. When settling the first debt, you can repeat the method with the next low-balance loan. Upon payment of the following debt, reinvest the funds with the remaining low loan and continue until each loan is repaid.
Deciding which student loan to repay first
To define which student loans to pay off first, you must list them and evaluate each. The strategy to follow will depend on the aspects that accompany the loans; for example, if it is federal or private, what is the interest rate that accompanies each one? Still, the most important thing is to consider the borrower’s current financial situation.
1. Type of Loan
The main types are federal and private. The federal government creates and is offered by filling out the Free Application for Federal Student Aid (FAFSA). Personal loans are those you borrow from banks or online lenders.
Federal student loans include more benefits than private loans, such as forbearance and deferment, income-based repayment options, and loan forgiveness programs. With this in mind, the strategy would be to pay off the private student loan.
One advantage of federal student loans is that they are either subsidized or unsubsidized. Therefore, paying off the unsubsidized loan first is recommended since they accrue interest during the studies and the grace period.
2. Interest rate
If you are looking for the most economical way to pay the debt, evaluate the interest rates of each loan using the debt avalanche method. This strategy allows you to prioritize paying off the debt with the highest interest rate.
The debt avalanche method is the fastest way to pay the least interest when you have different loans with different interest rates. Another alternative is the method in combination with refinancing; this would reduce the rates of private loans when consolidated with a private lender.
3. How much debt you have
Evaluate how much you owe on each loan and apply the debt snowball method to prioritize which student loan to pay off first. This strategy works for some people better than the debt avalanche method because it has a motivational structure.
The debt avalanche method helps you pay off loans quickly; with the debt snowball method, you should eliminate the first smaller debt quickly, prompting and motivating you to continue with the next one.
Because the debt snowball method focuses on the total balance, there is a chance that you will pay more in real interest than using the debt avalanche. It is advisable to use the snowball method when interest rates are within one percentage point.
You can pay off a student loan early
You have the option to pay off the student loan early. Companies are not allowed to charge a prepayment fee. Private student loans have little downside, so you can do this, saving you money on interest and freeing up your financial situation a bit.
Federal student loans are another matter as payments have stopped and interest charges have been canceled for most student loans from March 2020, so it makes sense to wait; you could get several months with a 0 percent APR, the forgiveness of part of the loan debt, or both.
Ultimately, which student loan you pay off first is up to you, although the best options are usually the one with the highest interest rate or the one with the least borrower protection. Evaluate each and set up a repayment plan with the terms, rates, and benefits in mind.