How to Choose Which Student Loans to Pay Off First
Whether you’re making your first student loan payments or are re-evaluating your financial goals, you might be wondering how you can choose which student loan to pay off first. Which loans should take priority?
You’ll probably want to tackle private student loans first since they typically have the highest interest rates. After that, you might take other factors into consideration, such as interest rates.
Considerations when choosing which student loans to pay off first
The type of student loans you have
You can choose which student loans to pay off first by making more than the minimum amount due on whatever loan you’re targeting.
However, many borrowers have a combination of federal and private student loans, so knowing where to start can be confusing. Before deciding which loan should take precedence, you need to gather your paperwork and check which types of student loans you have.
Federal student loans
If you took out a federal student loan on or after July 1, 2010, then you probably have a Direct Loan.
Federal student loans taken out before July 2010 could be either a Federal Family Education Loan (FFEL) or a Perkins loan. The government stopped issuing these loans and replaced them with the Direct Loan program, but you may still be paying on them, depending on when you borrowed.
In general, federal loans have stronger borrower protections and lower interest rates than private student loans (regardless of what your federal loan may be called). Because of these benefits, you should focus your efforts on paying off your private loans first.
For example, let’s say you’re a public school teacher with federal and private student loans. You’re also eligible for the Public Service Loan Forgiveness (PSLF) program, which means your federal student loan balance will be forgiven after 10 years of qualifying payments.
If the above case is true, then it makes sense to continue making the minimum amount due on your PSLF-eligible federal loans since you’re working toward student loan forgiveness. Instead, you might want to aggressively pay off your private student loans, since those will not be forgiven (and probably have a higher interest rate).
Do you have both Direct subsidized and unsubsidized loans?
Depending on your school’s cost of attendance (and your financial need), you might have both subsidized and unsubsidized loans. In that event, you may want to pay off your Direct unsubsidized loans first, especially if you’re just out of school.
Interest rates on each of these loans are identical for undergrads. However, interest doesn’t start to accrue on your subsidized loans until after your six-month grace period. As a result, your unsubsidized loans likely have a higher balance.
Private student loans
There are many different companies that issue private student loans. While you can find your federal loan details via your loan servicer, they won’t have information on non-federal debt.
Instead, you can find your private student loans by checking your credit report. You can obtain a free credit report from the three main credit reporting agencies — Experian, TransUnion and Equifax — by visiting AnnualCreditReport.com.
Unlike federal student loans (which are standardized by the government), private student loans make up most of their own rules. Private loans play an important part for those who can’t afford college otherwise, but they usually come with fewer benefits, such as deferment, forbearance and forgiveness. Therefore, it’s best to knock these loans off first.
Your interest rates and loan balances
Getting an overview of who and how much you owe is one of the first steps toward choosing a repayment strategy that works for you. To do this, you could create a student loan spreadsheet. On the sheet, be sure to include the name of each loan, its balance, its interest rate and your minimum monthly payment.
If you have private loans, you’ll also need to figure out if your interest is fixed or variable. (Federal loans from after 2006 all have fixed rates). Variable interest rates can be risky during times of economic uncertainty or when inflation is high, so you may want to pay these off before your fixed-rate loans.
Student loan payoff strategies
Having more than one student loan can feel like a balancing act, but coming up with a clear repayment strategy can help ease some of the pressure. Here are four tactics to consider:
Don’t forget to make minimum payments on all your loans
Getting strategic about paying off your student loans can lead to a debt-free life. But even if you decide to prioritize one loan over another, be sure to pay at least the minimum amount due on all of your loans. Failing to make minimum payments could result in student loan default, tanking your credit for years to come.
Pay off your private student loans first
As mentioned, private student loans should probably take precedence over federal. You’re likely paying more interest on the private debt, and if you fall on hard times, your private loans may provide fewer options than your federal loans.
Pay off your highest-interest student loans first
The debt avalanche method is a popular debt repayment strategy that requires you to focus on your loan with the highest interest rates first, regardless of that loan’s balance. This could save you a substantial amount, since you would pay less accrued interest over time.
While effective, the debt avalanche method may not be the best choice for everyone. If your highest-interest loan is also the one with the highest balance, you might end up losing motivation since you could be chipping away at the same debt for years.
Pay off your smallest student loans first
In contrast to the debt avalanche, those using the debt snowball method ignore interest rates and instead pick off their loans with the lowest balances first. Once you’ve taken care of your smallest student loan, you’ll attack your next smallest and so on.
The idea behind the debt snowball is momentum. The “quick wins” that come along with completely paying off your smaller loans can motivate you to keep you on track with repayment.
Debt avalanche or debt snowball: Which is better?
LendingTree conducted a study comparing the debt avalanche vs. the debt snowball, and we found that both repayment strategies yield just about the same results.
Based on our hypothetical scenarios, most borrowers carrying average levels of debt with average APRs will save about the same amount in interest and pay their debt off faster, no matter which of the two methods they choose.
In other words, if you can’t decide between the avalanche and the snowball, pick the one that’s easiest for you to stick to over the long haul.
Pay off a single refinanced student loan
If you have more than one private student loan, you could consider refinancing.
Student loan refinancing allows you to combine several loans into one. This could be a good option if you’re struggling to keep up with multiple student loan bills or if you’ve improved your credit from when you initially took out your loans (since you may now qualify for a lower interest rate).
Although it’s possible to refinance federal student loans into private ones, it’s not something we usually recommend. Because you would lose federal protections by switching to a private refinancing loan, you probably would only want to go this route if you’re near the end of repayment and can save money on the interest.
Rather than refinancing, federal borrowers may want to explore student loan consolidation. Consolidation is similar to refinancing — you’ll combine multiple federal loans into one federal consolidation loan. But because your loan will remain federal, you’ll get to keep your federal borrower perks.