How To Decide Which Student Loans To Pay Off First

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Paying off your highest interest student loans first will save you the most money in interest. This is the best strategy to use when trying to decide which student loans to pay off first.

If you have trouble staying motivated, consider paying off your smallest balances first. This will reduce the number of loans you’re dealing with. Seeing the dwindling number of loans will keep you motivated and forging ahead.

Both strategies are effective for paying down your student loans. Which strategy is best for you depends on your personal preference. When trying to decide which student loans to pay off first, choose one that helps you stay on track till you’ve cleared your debt completely.

There’s No Magic Solution to Paying Off Student Loans

You’ve graduated and are looking forward to life on the outside, and of course that long-awaited financial freedom. But the reality is, if you’ve taken student loans to fund your college education, the path to financial freedom is paved with student loan repayments. For the first few years after graduation, most of the money you earn will, or should, go towards paying back your student loans and reducing your overall debt.

If you are saddled with multiple student loans, which is not at all unusual, paying back the student loans is not going to be as straightforward as you would like it to be. Your first hurdle is going to be how to decide which student loans to pay off first.

Student loans taken from several lenders will usually have different payment plans, varying interest rates, and different balances, too. With so many factors to keep track of, managing your loan repayment can quickly turn into a nightmare if you are not careful.

Adding to the challenge is the fact that as a new graduate, you won’t be earning a very handsome income. You are more likely to be earning a beginner’s salary. And from that modest paycheck, you have to somehow manage your monthly repayments and still have enough to pay towards rent, groceries, utilities, transportation, and other expenses.

Tips For Developing A Student Loan Repayment Strategy That Works For You

No matter what your financial struggles, you will have to pay back all of the money you’ve borrowed. With interest. This can add up to a substantial amount over the loan term. While paying the loan may seem insurmountable, with an effective plan you will be well on your way to having your debts paid off. The key to staying on top of your debt is being strategic in paying back your loan.

Before you start making the payments, spend some time figuring out your personal finances. What is your monthly income? How much of your income goes towards essential expenses? How much unallocated money do you have every month that you can put towards paying off your student loans.

After you’ve figured out your financial circumstances, it’s time to assess your loans. How many loans do you have? What types of loans are they- federal or private? What is the interest rate on each loan? What is the total amount and monthly repayment for each?

The answers to each of these questions will help you decide which student loans to pay off first. You can then make a smart loan repayment plan based on that. Taking the time to develop a loan repayment strategy is the key to making your loan repayments more manageable and potentially lowering the overall cost of your debt.

These tips will help you decide which student loans to pay off first.

Strategy 1- Pay Off The Student Loans with The Highest Interest First

Take a look at the different loans and compare the interest rates of each one. As a general rule, federal student loans have a lower interest rate as compared to private student loans. Within each of these categories, different loans will have different interest rates, too.

It usually makes the most sense to pay off the loan with the highest interest rate first. That means paying off your private student loans first and the federal student loans later.

Of course, you will still need to make the minimum payment on your federal student loans. You cannot simply renege on that. When you’re considering paying off a loan first, you will have to do this while still making sure you continue making the minimum payments on all loans. Missing a payment will mean additional late fees, interest on the outstanding, and dealing with collection agencies. All of these repercussions will only end up increasing your debt and your stress levels.

Here’s what you need to do to pay off your highest-interest student loans first:

  1. Keep aside the money you need to make the minimum monthly repayments on all loans
  2. From the balance money, keep aside what you need for your rent/mortgage, utilities, and other essentials
  3. Put whatever is leftover towards paying back the student loan with the highest interest rate.

Just this one strategy will help you save a substantial amount because it immediately reduces that huge amount you are paying towards interest.

Strategy 2 – Pay Off Your Smallest Student Loan First

If comparing interest rates and making elaborate payment schemes seems overwhelming to you, financial experts suggest using another strategy. This focuses on sorting out your loans from smallest loan amount to biggest loan amount.

Start with the student loan that has the smallest balance and pay that one off first regardless of its interest rate. When you’ve cleared this balance completely, focus on the loan with the next lowest balance.

As you pay off each student loan, you will have one less loan to manage. It’s amazing how much more accomplished you feel as each loan is paid off. Moreover, it will also keep you motivated to pay off the rest of your loans. Just one small victory can be enough to encourage you to pay off the larger loans.

With this strategy as well, you will need to make sure you are continuing to make the minimum payments on the other loans at the same time. You can use the same steps as in the earlier strategy. The only difference is, instead of putting the extra money towards the loan with the highest interest, you put it towards the smallest loan.

Remember, the aim here is to cut back on the number of loans you are dealing with so you don’t feel so overwhelmed.  Every time you pay back any one loan fully, you have one less payment to track and that much less stress.

Look At Your Student Loan Terms and Conditions

Another thing to take into consideration is the repayment terms and conditions on your student loans. Generally, private loans have much stricter terms as compared to federal student loans. While you can negotiate a lower payment on federal loans based on your income, most private student loans will not have this option.

Federal loans also typically offer more and better benefits such as income-based repayments or loan forgiveness if you qualify for it. Private loans do not offer these benefits, which is another reason to make these your priority and pay them off as quickly as you can.

Once your private loans are paid off, you should start thinking about putting more money towards your federal loans. Don’t continue with paying the minimum payments. By this time you should be earning a higher salary and will be able to pay back more than the minimum. Recalculate how much you need towards essentials and put the dispensable income towards your federal loan payment. The sooner you have all your student loans paid back, the sooner you can enjoy your well-deserved unbridled financial freedom.

Consider Refinancing Your Private Student Loans

While paying off your student loans, you should also explore your refinancing options at the same time. Refinancing involves exchanging your current loans for a new loan. The new loan will have a different interest rate and different terms and conditions.

If the interest rate on your private student loans is just too high, consider refinancing if you can get a lower rate. If you took a private loan as a student, there is a good chance the interest rate on the loan would be relatively high. This is because private lenders quote interest rates based on your financial credentials. If you now have a steady paycheck and decent credit, you could probably refinance your loans at a lower interest rate.

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Check your credit score. If it has improved since you first took the loan, you may qualify for a lower rate of interest.

Also, do a quick online search for the latest interest rates on loans. Alternatively, go to lenders’ websites and check what interest rates they are currently quoting on loans. If the rate is lower than what you are paying right now, you should definitely consider refinancing. The lower rate can translate to significant savings over the loan term.

Don’t be in a rush to refinance federal student loans. These loans usually have lower interest rates and more flexible repayment options, which can come in handy. You may also be able to get your outstanding federal students forgiven if you meet certain criteria. Refinance federal student loans only if you’re sure you won’t need any of the protections and if the interest rate is lower than rate you’re paying right now.

Before you make any decisions about refinancing student loans, talk to the lenders. They have experience and can give you sound advice. Think it through, explore your options, and do extensive calculations before deciding which student loans to pay off first and the best way to manage them.

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