Creating a plan to tackle your student debt is a great first step to paying off your loans. Focusing on high-interest loans could help you save on interest costs in the long term, while focusing on the “wins” of paying off smaller loans may help you stay motivated.
To help you decide which student loans to pay off first, here are some different strategies to consider.
What to Do Before Paying Down Your Student Loans
Make Sure You’re Financially Secure
Before committing to paying more than your minimum monthly student loan payment, ensure you’re financially secure so you don’t overextend yourself. Here are a few ways to accomplish that goal:
- Make a strategy for paying other high-interest debts, like credit cards
- Save an emergency fund
- Open a retirement account, like a 401(k), and contribute enough to earn the full employer match, if offered.
Once your finances are in good shape, you may be able to save money and pay off student loans simultaneously without other factors getting in the way.
Organize Your Student Loans
Before you dive into a new repayment strategy, start organizing your student loans. Answer the following questions:
- Who is your lender(s)?
- Do you have private student loans, federal student loans or both?
- Are your loans subsidized or unsubsidized?
- Do you have fixed or variable interest rates? What are your interest rates?
- What are your student loan balances?
- What are your minimum payments, and how do you normally submit your payments?
- Do you have a cosigner?
Consider Refinancing Your Student Loans
If you have mostly private student loans and you want to lower your interest rate, explore the benefits of student loan refinancing. You don’t need to refinance your federal student loans if you’re worried about sacrificing the benefits that come with them. Refinancing your private student loans could reduce your interest rate, especially if your credit has improved substantially since you borrowed your original loans.
Look at your current student loan interest rates, and if you have multiple high-rate loans, consider prequalifying for a student loan refinance to determine if you might be eligible for a lower rate. Reducing your rate by even a small percentage could result in big savings, especially if you have large student loans.
Decide How Much You Will Put Towards Paying Off Your Loans
Once you’ve organized your student loans and determined if it makes sense to refinance, it’s time to start budgeting. Determine what your minimum payments are each month, and if you’re financially secure, decide whether you can afford to make additional payments toward your student loans.
Once you’ve decided how much you’re prepared to pay each month, then you can choose a student loan repayment strategy.
5 Student Loan Repayment Strategies to Consider
1. Pay Off Private Student Loans First
If you have both private and federal loans, you may be wondering which student loan to pay off first. In many cases, focusing on private student loans first could make sense, especially if you’re taking advantage of federal student loan benefits, such as income-driven repayment (IDR) plans or public service loan forgiveness (PSLF).
2. Prioritize Student Loans With the Highest Interest Rate
If you want to focus on saving the most on student loan interest, you may prefer the debt avalanche method. This method involves prioritizing your loans by rate, then paying down the highest-rate loans first.
Start by ordering your student loans from the highest interest to the lowest. Then start making extra payments towards the highest interest student loan first, while still making the minimum payments on your remaining loans.
Ensure all extra payments go towards your loan’s principal so your balance decreases. Once the highest-interest loan is paid in full, use the money you’re no longer paying toward it to pay down your next highest interest loan.
While this repayment strategy might save you on interest in the long term, it could take longer to see progress with the debt avalanche method. For instance, if your highest-rate loan is also your largest, paying it off might take a while.
3. Paying Off Student Loans With The Smallest Balance First
If you are more motivated by immediate gratification and small victories, then the debt snowball method may be a better fit for you. With this method, you focus on paying your smallest student loan off first. Once the first loan is paid off, use those additional funds to pay down the principal on your next smallest student loan.
By paying your lowest-balance student loans first, you can enjoy the faster gratification of watching them disappear one by one. These quick wins could help keep you on track as you continue your student loan repayment.
With this method, you may wind up paying more in interest over time because you won’t always focus on your highest-interest loan first. However, it might be worth paying that extra money if this strategy is the key to staying motivated.
4. Paying Off Unsubsidized vs. Subsidized Loans First
If you have both unsubsidized and subsidized student loans with similar interest rates, it often makes sense to pay off your unsubsidized loans first.
Unsubsidized student loans accrue interest from the day they’re disbursed. On the other hand, subsidized student loans won’t accrue interest until the end of your six-month grace period after graduation. Because your unsubsidized loans will have had more time to accrue interest, paying them off first will prevent those balances from growing even larger.
4. Choosing Between Two Loans With The Same Interest Rate
Depending on what motivates you, if you have two student loans with the same interest rate, choose the one that will be most satisfying to pay off.
If you’ve opted for the debt avalanche strategy because you want lower interest costs over time, then aim to pay off the larger loan first. If you appreciate small victories, then pay off the smaller loan first. Ultimately, the choice is up to you.
The Benefits of Making Extra Student Loan Payments
Making extra student loan payments will help you reduce your long-term interest costs and free you from the burden of monthly student loan payments faster. This will allow you to focus on putting your extra money toward other things, such as saving for a home down payment or maximizing your retirement contributions.
