Which Student Loan Should You Pay Off First?

The average college graduate ends up with more than $37,000 in student debt. Finishing school, finding work, and balancing new financial priorities can be overwhelming when you combine—especially if paying off student loans requires paying several hundred dollars a month.

Having a debt management strategy and dealing with it can help recent graduates manage their finances and stress.

Which student loan should be paid off first?

If you have a combination of government and private loans, you'll need to devise a repayment strategy. Which Student Loan Should I Pay Off First?

What kind of loans do you have?

Before you decide which student loan to prioritize, find out what types of student loans you have. Federal and private are the two primary categories. Federal loans come from the federal government and may be provided when filling out the Free Application for Federal Student Aid (FAFSA). Private loans are loans you get from banks, such as Citizens Bank or Discover, or online lenders, such as SoFi or College Ave.

Federal student loans include more benefits than private student loans, such as deferment, forbearance, income-based payment options, and loan forgiveness programs. For this reason, it may be wise to pay off your student loans first.

If you have federal student loans, they can be either subsidized or unsubsidized. It is usually best to focus on your unsubsidized loans first because they accrue interest during school and the grace period.

Not sure what type of debt you have? Open your account and see the loan names. If you see words like "federal," "subsidized," "unsubsidized," or "direct," you likely have federal loans. You can also contact your loan service provider's customer service department for confirmation. Some loan companies serve both federal and private loans, so don't assume the type of loan you'll get based on the service.

What are your interest rates?

If you want to focus on the cheapest way to pay off your debt, check interest rates if you want to use the debt avalanche method.

The debt avalanche strategy prioritizes repaying debts with the highest interest rates first. For example, if you have a loan at 10 percent interest and a loan at 7 percent interest, you will pay more on the loan at 10 percent interest than the minimum repayment of the loan at 7 percent interest.

If you have several different loans with different interest rates, the debt avalanche method is usually the quickest way to pay them off. You will also pay as little interest as possible. You can also use this method with refinancing - you can potentially lower the interest rates on your own loans by merging them with a private lender.

How much debt do you have?

Another way to approach your repayment strategy is to look at how much you owe on each of your debts and use the debt snowball method to prioritize repayment.

The debt snowball method means paying off the debt with the lowest balance while paying off the rest. Once you pay off that loan, you move to the next smallest balance. As a result, the snowball effect occurs, hence the name.

While the debt avalanche method usually helps you pay off your debt faster, the debt snowball method works better for some people because of its motivational structure - you have to pay it off first and foremost. Small debts must be paid off relatively quickly, which can keep you on top of each debt in a row.

Since the snowball method focuses only on the total balance, you may pay more in total interest than you would if you used the avalanche method. If you don't want to pay more interest than you need to, use the snowball method only if your interest rates are within a percentage of each other.

How to choose between paying off a student loan first or paying off a loan second

Student loan interest rates are generally relatively low compared to interest rates for other types of loans, which means they may be lower on your priority list for loan repayments.

For example, federal student loans for the 2023-24 school year will come with fixed interest rates between 5.50 percent and 8.05 percent. Many students who took out loans in previous years pay much lower rates. At the same time, the average credit card interest rate is now above 20%.

Examining interest rates can help you work out the order in which you can prioritize which debts to pay off using the avalanche method mentioned above.

For example, if you have a car loan at 6 percent interest, a credit card with an interest rate of 21 percent, and a student loan at 8 percent, pay off your higher-interest loans before making any additional payments. sense. toward student loans, which charge little interest.

Should you pay off your student loans early?

It is prohibited for companies to impose a prepayment fee if you opt to pay off your student loans early. If you have private student loans, there are few downsides to paying off your student loans early, if you can. Doing so will save money with interest and free up your budget for other financial goals.

If you have federal student loans, you probably haven't made a regular payment in a while (or, depending on your graduation date, at all). If you're struggling to balance your bills, the federal government has announced a 12-month "on ramp" for repayments, easing penalties for borrowers who default on their payments by September 2024. It's not valid for a limited time through the end of 2024. While other loan payments are late, you can take advantage of this opportunity to make up payments while outstanding student loan payments will not be reported to credit agencies, or marked as overdue.

Federal student loan borrowers should also review the available payment plans, considering whether they can set aside any available money in their budget to pay off high-interest debt.

Bottom Line

Determining which student loan to pay first is up to you, but the best option is usually the one with the highest rate or the lowest consumer protection. The best strategy for you may also vary based on what type of student loans you have and how much student loans you have taken out in general.

No matter what you decide, it's best to be strategic with your student loans. A student loan payment plan that takes into account loan rates, terms, and interest can help you get out of debt faster while maintaining maximum consumer protection.