Which Student Loan to Pay Off First?

When it’s time to repay multiple student loans, it can be difficult to know where to begin. You may even wonder which student loan to pay off first and you’re not alone in asking about the best path forward.

Ideally, you’ll want to pay off student loans with the highest interest rates first. Private student loans typically have higher interest rates than federal student loans, so we suggest you start with paying off private student loans first to save you the most money in the long term. You can also consider refinancing which can potentially give you a lower interest rate that’ll help you manage and pay off your debt faster.

There are a multitude of different methods and approaches for paying off debt, especially if you are looking for a fast approach.

3 Approaches to Paying off Multiple Student Loans

Avalanche Method (Pay Off High-Interest Loans First): Paying off your student loans by tackling the ones with the highest interest rates first can help you get out of debt faster. To use this approach, add up your student loan minimum payments and organize them from highest interest rate to lowest. Based on your monthly budget, determine how much you can comfortably afford to pay beyond the minimum required payments.

Let’s say you have one student loan at a 2.5% rate, another loan with a 4% rate, and a third student loan with a 6% rate. With the avalanche method, the 6% loan would be your priority because it has the highest interest rate out of the three. If you can put an additional $100 beyond your minimum payments, it will go toward that loan until it is paid in full. Then you add that debt’s minimum to the additional $100 payment you’re making and contribute the total toward the student loan with the second-highest interest rate. Continue eliminating debts and rolling those minimum payments into the additional student loan debt until all student loans are paid off.

Snowball Method (Pay Off Small Loans First): Rather than paying off loans that prioritize the highest interest rates first, the snowball method suggests paying off loans with lower balances first and working your way up. When the smallest student loan is paid off completely, you roll the money you were paying on that loan into the student loan with the next smallest balance. This can be an effective method for some borrowers because it enables them to pay off accounts in full faster, thus lowering the number of overall payments at a faster rate.

Loans with cosigners and variable rates: Not all loans are created equally, so you’ll also want to examine the terms of each student loan you have when you’re finalizing a debt repayment plan. If someone cosigned a loan for you, you may want to prioritize repaying that loan first to assure your cosigner that the debt has been taken care of. Loans with variable rates will have interest rates that change and fluctuate, so you’ll want to aim to create a plan that works on eliminating that debt before the rates change. If you have a private student loan through College Ave Student Loans, we also have specific tips and suggestions for paying it off.

No matter which approach you choose, it’s important to make sure you’re making your minimum monthly payments for each loan on time. Most lenders also give you an interest rate discount for enrolling in automatic payments.

Subsidized vs. Unsubsidized Loans: Which to Pay Off First?

Understanding your loan types is crucial in determining which loan to pay off first. Between private and federal student loans, it would be most beneficial to pay private loans off first considering the interest rate is typically higher than federal student loans and federal student loans offer special benefits not offered on private loans.

There are two types of federal student loans: subsidized and unsubsidized. Subsidized loans are designed to help students who can demonstrate a financial need. They often have more favorable repayment terms. Unsubsidized loans are available to undergraduate and graduate students with or without demonstrated financial need. If you have a mix of both unsubsidized loans and subsidized loans, you’ll want to focus on paying off the unsubsidized loans with the highest interest rates first, and then the subsidized loans with high-interest rates next. Once these are paid off, move on to unsubsidized loans with lower interest rates. Subsidized loans that have the lowest interest rates will cost you less overall, so these should be saved for last.

Subsidized student loans do not accrue interest while enrolled in college at least half-time or during deferment periods. Unsubsidized student loans, on the other hand, charge interest during in-school, deferment, and grace periods. How much interest you’re charged and how it accrues over time plays an important role in prioritizing which student loans to pay off first.

How Can I Pay Off My Student Loans Faster?

While the avalanche method or snowball method can certainly help you pay off your student loan debt faster, there are also other approaches you can take if you’re looking to eliminate student loan debt as quickly as possible. Enrolling in automatic payments can ensure that you never fall behind on payments and that you stay on schedule because otherwise, falling behind can slow down the repayment process. Biweekly payments, if feasible, can also make it easier to pay off student loans faster. If you’re paid biweekly, consider setting aside a fixed amount from each paycheck and putting it toward your student loan debt.

However, paying off student loans early may not be for everyone. There are a few instances where you may want to spend extra money elsewhere instead of on your student loans:

  • Remember to start an emergency savings fund that is equivalent to 1-3 months of expenses.
  • Start saving for retirement early and contribute to a 401k or a Roth IRA if it’s available to you through your employer.
  • Stay on top of credit card payments as they often have the highest interest rates.
  • Enjoy life without dedicating all of your time, money, and energy to repaying your student loans. You can set aside funds for an affordable vacation or save a little extra money for a nice dinner out at a restaurant.

Consider Refinancing to Pay off Student Loans

Refinancing can be a good solution if you have multiple student loans. It enables you to roll all loans into a single loan, which can also give you a new and potentially lower interest rate, which can allow you to pay off your loan faster. Additionally, focusing on just one loan payment, rather than numerous payments, can be easier to manage overall. At College Ave, we offer student loan refinancing options that can help you reduce your monthly student loan payments. Knowing which student loans to pay off first can be a difficult decision. But remember, there is no one-size-fits-all approach to managing debt. Be sure to consider all of your options and make the best choice for your financial future.

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