Which Student Loan to Pay off First
Student loan repayment is important to stay in good financial standing. This article will help you navigate repayment decisions and options.
If you've graduated from college and have multiple loans, you're probably wondering which student loans to pay off first. Many people end up with many loans to pay, including both federal and private student loans.
Being strategic about paying down your debt can help you save on interest and take full advantage of borrower benefits some of your loans provide.
Here's what you need to know to help you decide which student loans to focus on paying off.
Should you pay off student loans early?
When you have student loans, you may not always need to decide which student loans to pay off first.
Each of your loans will come with minimum payments and a set payoff schedule. You can choose to make those payments as required by your lender and not pay anything extra. If you take this approach, the agreements you have with your lenders will determine when you'll retire each debt.
You have to make a decision on which student debt to pay first only if you plan to make extra payments to become debt-free ahead of schedule. In this case, you should make the minimum payments on all of your loans and make a strategic choice about which student loans to pay off first so you can send more money to those particular loans.
Paying off student loans early doesn't always make sense because these loans tend to have low interest rates and the interest may be tax deductible. There may be better uses for your extra money.
So before you decide on an early payoff plan, think about whether you might be better off just paying the minimums on each loan and investing the difference.
How to decide which student loans to pay off first?
If you decide you want to pay off student loans early, there's a few different strategies to help you decide which student loans to pay off first.
The right one will depend on your mindset and goals for debt payoff.
Pay off these loans first if you want to pay the least interest over time
One option is to focus on reducing your interest costs as much as possible. This would mean paying off loans with the highest interest rates first.
Usually, that would mean paying off private student loans and then moving onto federal student aid.
By focusing on retiring your high interest debt, you can ensure that your total loan costs over time are as low as possible.
Pay off smaller loans first if you need help staying motivated
While paying off high interest loans first is the smartest approach to save money, some people prefer to focus on paying off loans with the lowest balance first -- even if they have a lower interest rate than other loans with bigger balances.
This is in keeping with the Dave Ramsey "Debt Snowball" approach, which is a very popular debt payoff plan. Ramsey, and many other experts, believe repaying the loan with the lowest balance first helps you to stay motivated because you see immediate progress.
However, while this may make you more likely to stick with a payoff plan, it also typically means paying more money over time since you could keep your high interest loans around for months or years longer than necessary.
If your goal is to save the most on your loans and know you'll remain disciplined about paying off debt, focusing on high interest loans is probably best for you. But if you find it hard to stick with your financial plans, the Debt Snowball approach could make the most sense.
Pay off loans in this order if you want to preserve your borrower benefits
Finally, another option is to work on paying off loans that offer the least borrower benefits and protections first. This can make sense with student loans because some types of debt-- such as federal student loans -- offer much better repayment terms than others.
If you take this approach, you'll likely want to pay off your loans in this order:
- Variable rate private student loans first: These loans don't offer the same borrower protections as federal student loans and the interest rate can fluctuate, making them a riskier loan.
- Then fixed rate private student loans: These still don't provide the benefits federal loans do, but you won't have to worry about your rate going up over time.
- Then unsubsidized federal loans: These generally have better terms than private loans, including a lower interest rate and more flexible payoff plans -- plus the possibility of loan forgiveness. And there's an easy answer to the question, which student loans to pay off first subsidized or unsubsidized, because these loans do not come with subsidized interest if you need to defer payments.
- Finally, pay off subsidized federal loans: These have ample borrower benefits, and if you are eligible to defer payments, the government will cover interest so it doesn't continue to accrue.
This approach can be the right one if you want to make sure you take full advantage of the unique features of federal student aid.
Consider refinancing your student loans
Many people want to create a plan for which student loans to pay off first because they hope to reduce the cost of loan payments over time. But there's another way to do that besides devoting extra money to loan payoff. You can refinance your student loans.
Both federal and private loans can be refinanced, although many people opt to refinance private loans only. That's because loans can only be refinanced with private lenders. If you refinance federal loans, you'd be giving up the flexible payoff process and other perks they provide.
Refinancing can often reduce your interest rate and monthly payment -- especially with current refinance rates near record lows. If you're able to drop your rates, early payoff could be easier because less of your payment goes to interest and more goes to reducing your balance. Or you may decide not to pay off loans ahead of schedule at all, since interest costs are so affordable.
Juno can help you qualify for the lowest possible refinancing rates. Juno groups students and families together and negotiates rates with lenders on their behalf to help make student loan refinancing as affordable as possible.
Christy Rakoczy Bieber
Christy Rakoczy Bieber is a full-time personal finance and legal writer. She is a graduate of UCLA School of Law and the University of Rochester. Christy was previously a college teacher with experience writing textbooks and serving as a subject matter expert.
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