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According to the latest data from the College Board, 55% of bachelor’s degree graduates from a four-year institution graduated with student debt of $28,400. In reality, however, this five-figure average is often a combined balance of small student loans over several years of study.
This combination of student loans usually has different interest rates, terms, and repayment options. To avoid extending your student debt repayments or paying more interest than necessary, figure out which student loans to pay off first.
Consider your loans before defining your strategy
Before deciding on the most effective repayment strategy for your student loans, you need to know the characteristics of each loan you owe.
Type of loan
Your student debt is made up of federal and private loans, or a mix of the two.
Private loans come with varying terms and repayment details, depending on the lender. Federal student loans are more standardized, but the exact terms depend on the type of federal loan you have.
You may have one or more of the following federal student loans:
- Subsidized direct loans: During your studies, during your grace period and in the event of deferment or abstention, accrued interest on subsidized loans is paid by the government.
- Direct unsubsidized loans: Unlike subsidized loans, you are required to repay all accrued interest on unsubsidized loans. This includes fees incurred during school, your grace period, adjournment, and abstention.
- Direct Loans PLUS: PLUS loans are available for graduate students or parents of undergraduate students. As with direct unsubsidized loans, interest accrues on PLUS loans as soon as funds are disbursed, and borrowers are responsible for all interest charges.
- Direct Consolidation Loans: If you have chosen to consolidate your existing federal student loans, a direct consolidation loan simplifies your repayment experience. Interest accrued on the loan is also not subsidized, so you are responsible for paying all interest charges.
Federal direct loans all have fixed interest rates. Whatever the interest rate on the loan was at the time you borrowed the funds, that interest rate will remain the same for the duration of the loan.
Private student loans, on the other hand, are offered as fixed or variable rate loans. Some lenders offer one option while others offer both.
A fixed interest rate provides the peace of mind of having the same payment month after month. Variable rates can fluctuate over time, depending on market conditions. Although variable rates can be advantageous when rates are low, there is always a risk that the rate will increase during the repayment period.
When deciding which student loan to pay off first, note whether your loans have fixed or variable rates, in addition to the rate itself. A higher interest rate means you’ll spend more money over time. Depending on your financial goals, you might choose to prioritize paying off high-interest loans, for example.
In addition to loan type and interest rate, a third consideration when choosing which student loans to repay first is your repayment plan.
A longer repayment term may lower your monthly payment, but you will pay more interest because it will take you longer to repay. A shorter term means you’ll pay off your student loan faster, but your monthly payments will be higher.
Also find out about the different repayment plans available for each loan you have borrowed. Federal student loans, for example, offer income-based repayment plans that can reduce your monthly payment to $0 per month, if your income qualifies. Private loans generally don’t offer income-contingent repayment options, but your lender can let you know your options if you’re having trouble repaying your loan.
3 Strategies for Repaying Your Student Loans
Once you’ve gathered all the details for each of your student loans, it’s time to choose a repayment strategy based on your financial goals. Here are three strategies that focus on different goals.
1. Repay private loans first
Best for: Borrowers with variable rate private loans
Private loans generally carry higher risks than federal debt. They don’t offer the generous features of federal loans, such as income-contingent repayment, rebate plans, and more flexible forbearance options. Private loans can also come with fluctuating variable rates that have increased since your first loan.
To pay off your private loan debt first, consider refinancing private student loans if you can qualify for a lower rate. A student loan refinance could offer the option of getting a fixed, low interest rate that will save you money over time. As you make payments on the refinanced private loan, continue to make minimum payments on your federal loans to keep them in good standing.
2. Pay the highest interest rate first
Best for: Borrowers looking to save the most money on interest charges
Paying off your high-interest debt first (also known as the debt avalanche method) can save you a lot of money in interest charges, although it may take some time. to see your progress. To start, make a list of all your student loans and identify the loan with the highest interest rate, whether federal or private. Allocate any extra funds you have to an additional monthly payment on this loan while making minimum payments on your other debts.
Continue with this payment approach until you have fully repaid the loan at the higher interest rate. Then do the same for the next highest interest rate on your student loan list, and so on. This strategy helps you spend less on your degree overall.
3. Pay off the smallest balance first
Best for: Borrowers motivated by the speed of progress
By paying off your loan with the lowest balance first (commonly known as the debt snowball method), you can get small gains quickly. This can encourage you to pursue your goal of being debt free.
After making the minimum monthly payment on all of your student loans, identify the student loan with the lowest balance. Put any extra money towards an additional monthly payment on this loan.
When you’ve fully paid off the student loan with the lowest balance, direct your extra money to your next smaller loan. You’ll pay off your small, individual loans faster, giving you the incentive to work your way through all of your unpaid student debt.
Choosing which student loans to pay off first will be different for each borrower. How you reduce your student debt to zero depends on many factors, including your loan type, its terms and characteristics, and your overall financial goals.