Which Student Loans To Pay Off First

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Contributor, Benzinga
August 14, 2023

More than half of all college students graduate with student loan debt. The average borrower owes $28,950 in student loans. That's enough for the downpayment on a small home. But instead, it can leave young professionals struggling to pay off debt a decade after graduation. Paying off student loans can be an important step in financial freedom. Read on to understand which student loans to pay off first to build the future you envision. 

How To Decide Which Student Loan To Pay Off First

Whether you're just getting organized or you earn enough to pay more than the minimum on student loans, the right strategy can save you more on interest payments. Here's what to consider:

Gather & List Loan Information

First, you need to know what you need to pay off. Compile a comprehensive list of your student loans, including both federal loans and private student loans.  

It's important to note loan balances, interest rates, loan types (federal or private), and lenders to help with the next steps. If you don't remember, you can find information on federal student loans at StudentAid.gov.

Identify High-Interest Loans

Next, identify the loans with the highest interest rates. By paying these off first, you'll save more in interest payments over time. The strategy of prioritizing loans with the highest interest rates is called the debt avalanche method. This approach is financially prudent, as it minimizes the overall interest paid over the loan term.

The alternative is the debt snowball method, in which you pay off the loans with the lowest balance first, working your way up to the larger loans. It can be more psychologically motivating for some people to see some debt cleared completely. The problem with this strategy is you'll pay more in interest unless the smallest debts also have the highest interest rates. 

If you want to maximize savings and can stay motivated, choose the debt avalanche method and pay off high-interest debt first. 

Consider Loan Type

Consider whether your loans are federal or private. Many graduates have a combination of private and federal student loans. Private student loans generally have higher interest rates, so you'll want to focus on paying them off first. 

Federal loans often come with more flexible repayment options and potential benefits. For example, federal student loans come with income-driven repayment plans, extensive deferment programs, and potential loan forgiveness. 

Evaluate Repayment Terms

Carefully assess loan repayment terms, including the length of the repayment period. While you should aim to pay off all debt before the final repayment period, prioritizing loans with shorter terms can help clear debt faster and reduce pressure to meet deadlines. 

Assess Tax Deductions

Federal student loans come with tax-deductible benefits. According to the IRS, you may deduct up to $2,500, or the actual interest you paid on student loans in a particular year. 

Consider the potential tax benefits when deciding which loans to pay off first. The tax-deductible interest on federal student loans is another reason to prioritize paying off private student loans first. 

Build Emergency Fund

While working to pay off student loans, it's still important to establish an emergency fund before aggressively paying off loans. The emergency fund provides a safety net in case of unexpected financial challenges, from a broken vehicle to unexpected medical bills. 

If you're short on cash, the emergency fund can also ensure you have a backup to pay at least the minimum on all student loan debt. 

Create A Repayment Strategy

To formulate a personalized repayment strategy, consider the options of targeting one loan at a time or prioritizing higher-interest loans while making minimum payments on others. In either case, you need to make minimum payments on all student loan debt while choosing which debt to pay off first. 

These two methods, the debt avalanche method, and the snowball method, each have pros and cons. If you want the satisfaction of clearing debts as quickly as possible, the snowball method may be better. If you want to pay as little as possible in interest, clearing all student debt faster, the debt avalanche method is the best choice. 

Should You Pay Off Your Student Loan Early?

It's important to align early student loan repayment with individual financial objectives. Student loans generally have low-interest rates. That's why it's important first to prioritize higher-interest consumer debt over early student loan repayment. 

That means if you've got credit card debt, a high-interest auto loan, or other higher-interest debt, you'll save more by paying that off first. Likewise, it can make sense to pay off all student debt before investing. Compare student loan interest rates with potential investment returns to maximize your money. 

If you can invest with an average of 7% return and your student loan debt carries a 3% interest rate, which is partially tax deductible, it can make sense to invest even while delaying some student loan repayments. However, this is highly personal, and some people prefer the freedom of clearing student loan debt before investing. 

Tips For Repaying Your Student Debt 

You've decided to repay your student loan debt as quickly as possible. These steps can help you clear that debt faster.

Organize Your Loans

Create a comprehensive list of all student loans, including details like loan type, balances, interest rates, and lenders. Proper organization helps track due dates, minimum payments, and overall debt management. If you set it up in a spreadsheet, you can easily update it to track your progress as the debt is paid off. 

Budget Wisely

Setting up a detailed budget covering essential expenses, loan payments, and savings goals can help you find extra funds for loan repayment. When creating a budget, start by tracking monthly expenses and building the budget around actual expense numbers. Then look for opportunities to cut back. 

If you prefer to do this online, several apps allow you to track and allocate your budget while linking to your credit and debit cards for seamless integration. The best budgeting apps include Acorns, Mint, Goodbudget, EveryDollar, and Empower Personal Wealth. 

Prioritize High-Interest Loans

You can save money on interest payments over time by prioritizing loans with higher interest rates.

For example, suppose you have $15,000 in federal loans with 5% interest and $10,000 in private student loans with 11% interest. If the private student loans have 15 years on the term, your average monthly payments will be $113.66. 

If you only pay the minimum, in the first three years of loan repayment, you'll pay $30 or less monthly towards the principal. The difference of $80 to $90 is all interest payments. By paying off that high-interest loan in 5 years instead of 15 years, you'll save $5,388 in interest, which will reduce your total payments and can help you pay off student loans faster.

Consider Income-Driven Plans

Federal loans offer income-driven repayment plans based on both income and family size. You have the option to apply for a lower monthly payment on an income-driven repayment plan (IDR) online. If you're struggling to repay federal loans or want to focus efforts first on repaying higher-interest loans, income-driven repayment plans can help. 

Make Extra Payments

Making additional payments beyond the minimum requirement can help you save significantly on interest rates over the lifetime of the loan. The impact of consistent extra payments on reducing loan balances and interest is significant.

Look for ways to cut back even $100 monthly and put it toward the loans. Consider cutting back on entertainment or streaming services, eating more meals at home, or buying used items when you need something. You can also sell unused items to make some extra cash to put towards loan repayments. 

Refinancing And Consolidation

Consider either refinancing or loan consolidation for lower interest rates. With refinancing. Refinancing combines both federal and private loans into a single new loan. Consolidating combines only federal loans into a single new loan amount. This can simplify loan repayments and also offer lower overall interest rates. 

Explore options for refinancing and compare rates to potentially secure lower interest rates. Be careful about the possible loss of federal loan benefits during refinancing. Read the fine print and ask questions before choosing a refinancing plan!

Stay Motivated!

There's an undeniable psychological aspect of loan repayment. The snowball method, discussed above, can be more psychologically motivating. Offer strategies for maintaining enthusiasm throughout the repayment journey include tracking total debt and watching it decrease each month or setting aside funds for a special reward at each debt repayment milestone. 

However, the most important reason to stay motivated is to find your "why". Why do you want to pay off student debt early? How can it help your life? What is the life you want to live that freedom from student debt can offer? Keeping this in mind makes it easier to find the motivation to save a little more each month. 

Which Loans to Pay First

Which loan should you try to pay off most quickly? If your main objective is to pay off student loans more quickly and save on interest, then focus on high-interest loans and private loans first. However, each person's financial situation is unique. If you're motivated by clearing debts, paying off the smallest balances first can be the best choice. Whichever strategy you choose, the key is to create a budget and aim to pay off as much as possible while still saving for other financial goals.

Frequently Asked Questions

Q

Which student loans should I pay off first?

A

Which student loans you should pay off first depends on your individual situation. Focusing on high-interest student loans first will help you pay off all loans faster.

Q

Should I focus on paying off federal or private student loans first?

A

For most people, paying off private student loans first is wise. Federal student loans offer better incentives, flexibility, possible forgiveness, and lower interest rates.

Q

How do I determine the order in which to pay off multiple federal loans?

A

The order to pay off multiple federal student loans depends on you. The two most common methods are to pay off the lowest balance first (snowball method), or the loan with the highest interest rate first (avalanche method).

About Alison Plaut

Alison Plaut is a personal finance writer with a sustainable MBA, passionate about helping people learn more about financial basics for wealth building and financial freedom. She has more than 17 years of writing experience, focused on real estate and mortgage, business, personal finance, and investing. Her work has been published in The Motley Fool, MoneyLion, and she is a regular contributor for Benzinga.