Which Student Loan to Pay Off First? Here’s A Guide

Graduating from college often comes with the burden of multiple student loans, leaving many borrowers wondering, “Which student loans should I pay off first?” The answer is not as simple as you think. Understanding the different types of loans you have, their terms, and how to prioritize them can help you develop a repayment strategy that minimizes interest and maximizes your savings.

What are the different types of student loans?

Before deciding which student loans to pay off first, it’s essential to understand the types of loans you might have. Student loans typically fall into two main categories: federal and private loans. Federal loans are further divided into subsidized and unsubsidized loans, while private loans can be either secured or unsecured.

• Federal Subsidized Loans: These are loans where the government covers the interest while you’re in school. This is done during the grace period and deferment. They are generally regarded as the most favorable option for borrowers.
• Federal Unsubsidized Loans: These loans are not need-based, and interest accrues while you’re in school and during deferment periods. Unsubsidized loans usually have higher interest rates.
• Private Loans: Private student loans typically have either fixed or variable interest rates and usually provide less flexibility than federal loans. These are the loans you can get from private lenders. These loans can be secured or unsecured, depending on the lender and on the loan you can get approved on.

Which student loan should I pay off first?

When determining which student loans to pay off first, consider several factors including the interest rate, loan balance, and type of loan. Prioritizing your repayment strategy can help you save money and reduce your debt burden more efficiently.

1. Private loans with high interest rates

Private loans, especially those with high interest rates, should generally be at the top of your repayment list. There are fewer advantages in paying off these loans since they’re not usually covered by debt relief programs. Additionally, the variable interest rates on many private loans can increase over time, making these loans more expensive to carry.

Why prioritize private loans?

• Private loans often come with higher interest rates and fewer repayment options.
• If you have loans with variable interest rates, these rates can rise, increasing your monthly payments.
• Focusing on paying off these loans first can help you save more money over time.

2. Federal unsubsidized loans

Once you’ve handled your private loans, turn your attention to federal unsubsidized loans. Interest on these loans starts adding up right from the moment the loan is issued, even when you’re still in school or if your loan is deferred. To avoid paying more in the long run, it’s best to pay off these loans sooner rather than later.

Why should I pay unsubsidized loans first?

• Interest accrues immediately, increasing your total debt.
• Paying off these loans early reduces the amount of interest you’ll pay over time.

3. Federal subsidized loans

Put federal subsidized loans lower on your list because they don’t gather interest while you’re in school or during deferment. If you have both subsidized and unsubsidized federal loans, focus on paying off the unsubsidized loans first. This will lessen the overall interest you’ll pay on that loan.

Other factors to consider when choosing which loans to pay off first

1. Loan Forgiveness Programs

If you qualify for a federal loan forgiveness program like Public Service Loan Forgiveness (PSLF), you may not need to pay off your federal loans ahead of schedule. In such cases, focus on making the required payments to qualify for forgiveness, and allocate extra funds to private loans instead.

Can you choose which student loan to pay off first?

• If you qualify for forgiveness, continue making minimum payments on federal loans and focus on private loans.

2. Repayment terms and flexibility

Federal loans usually come with more flexible repayment options, including income-driven repayment plans, deferment, and forbearance. These options can provide a safety net if you experience financial hardship. Private loans, on the other hand, may lack such flexibility, making them more urgent to pay off.

What student loans to pay off first?

• Loans with fewer flexible repayment options should be prioritized to avoid future financial strain.

3. Debt repayment methods: Snowball vs. Avalanche

When it comes to repaying your student loans, two popular strategies are the debt snowball method and the debt avalanche method.

• Debt Snowball Method: This method involves paying off the smallest loan balances first, no matter the interest rates. The goal is to build momentum by knocking out individual loans, which can boost your motivation to keep going.
• Debt Avalanche Method: The avalanche method focuses on paying off loans with the highest interest rates first. The beauty of this method is that you get to save money in the long run.

Which method should you choose?

• The snowball method may be better if you need motivation and prefer quick wins.
• The avalanche method is more effective for saving money on interest.

Should you consolidate or refinance your student loans?

Consolidating or refinancing your student loans can simplify your repayment process, but it’s important to consider the pros and cons.

Federal loan consolidation

If you have several federal student loans, consolidating them into a Direct Consolidation Loan can make managing your payments easier. Take note that consolidating might result in your repayment period extending and higher interest. This means you’ll end up paying more in the long term.

Refinancing private loans

Refinancing your private loans could result in lower interest rates on your private student loan. But only use this on private loans since refinancing your federal loans will result in you losing access to federal benefits.

Managing your student loans effectively

Managing student loan repayments might seem daunting, but having a clear plan can help ease the process. Always prioritize loans that cost you the most in interest and offer the fewest benefits. Use tools like loan calculators to guide your decisions, and stay informed about your options for consolidation or refinancing.

The important thing is to stay active and well-informed, frequently checking your loans and adjusting your plan as necessary. Whether you prioritize based on interest rates, loan types, or repayment flexibility, the important thing is to keep moving forward, one payment at a time.

Your path to financial freedom

Deciding which student loans to tackle first depends on your financial situation and personal goals. Whether you decide to pay subsidized or unsubsidized loans first, the most critical factor is consistency. Keep making those payments, stay informed about your options, and take steps toward a debt-free future. Your diligence now will pay off in financial peace of mind later.