How To Decide Which Student Loan You Should Pay Off FirstFebruary 18, 2021
Deciding on a plan to tackle your student loan debt is a great first step to paying them off. Focusing on high-interest loans could help you pay off student loans faster, while focusing on the “wins” of paying off smaller loans may help you to stay motivated.
To help you decide which student loans to pay off first, here are some different strategies to consider:
Make Sure You’re Financially Secure
Before you commit to paying more than your minimum monthly student loan payment, be sure you’re financially secure. 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)
Once your finances are in good shape, you may be able to both save or pay off student loans without other factors getting in the way.
Organize Your Student Loans
Before you dive into a new repayment strategy, you should organize your student loans. Answer the following questions:
- Who is your lender?
- Do you have private student loans, federal student loans or both?
- Are your loans subsidized or unsubsidized?
- Do you have a fixed or variable interest rate? What is your interest rate?
- Do you have a cosigner?
- What is the minimum payment, and how do you normally submit your payments?
Decide How Much You Will Put Towards Paying Off Your Loans
After you’ve organized your student loans, it’s time to budget. Determine what your minimum payment is 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.
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, you may want to focus on private student loans first, especially if you’re taking advantage of federal benefits.
If you have mostly private student loans and you want to lower your interest rate or your monthly student loan payment, then be sure to explore the benefits of student loan refinancing. You may even be able to refinance only your private student loans if that’s the best fit.
Choose Student Loans With the Highest Interest Rate
To use this method, order your student loans from the highest interest to the lowest. Then start making extra payments towards the highest interest student loan first, while still paying the minimum payment on the remaining loans.
Be sure all extra payments go towards the principal of the loan so the balance will decrease. Once the highest interest loan is paid in full, use the money you’re no longer paying toward it to eliminate your next highest interest loan.
Paying Off Student Loans With The Smallest Balance First
Choosing which student loan to pay off first can be a challenge, but knowing your motivators can help. 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 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 instant gratification of watching them disappear one by one. This may keep you motivated as you continue your student loan repayment.
With this method, you may wind up paying more in interest because you won’t always focus on your highest-interest loan first. However, it may be worth the extra money if this strategy keeps you motivated.
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. Subsidized student loans, on the other hand, won’t accrue interest until the end of your grace period. Because your unsubsidized loans will have had more time to grow, paying them off will prevent them from accruing more interest.
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 the big wins, then you may 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
With $35,000 in student loan debt and a 7% interest rate, if you make only the minimum payment of $315, you will pay $21,700 in interest. If you make an extra payment of $100 per month, this could save you more than $7,000 in interest costs and speed the repayment process.
The Debt Avalanche Strategy may be a good fit for individuals who are highly self-motivated or motivated by savings. Here are a few things you can do to make the most of this student loan repayment strategy:
Pay Off Student Loans With Found Money
Throughout the year you may receive money you did not expect, whether in the form of a rebate, gift, tax refund or credit card rewards. Use this “found” money to make additional payments on the loan you are focusing on. Every little bit will help to pay down your principal balance.
Use Visuals to Motivate Your Student Loan Repayment
Use debt coloring sheets, graphs or a debt tracker to see how much your loan balance is going down. Especially because paying off high-interest student loans can be a slow-going process, using a visual method to track your progress may be motivating.
Refinance Your Student Loans
If you’re aiming to lower your student loan interest rate or your monthly payment, consider student loan refinancing. Not only will you have the opportunity to apply for a new interest rate if your financial situation has improved, but could also change your repayment term to better fit your financial needs.
If you’re looking to refinance with a reputable student lender, ELFI is ready to help! To see an estimate of how much you could save, use our Student Loan Refinancing Calculator.