How To Decide Which Student Loans To Pay Off First

Yellow background with purple and blue geometric designs and text that says "Which loan first?"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 you graduate, most of the money you earn will, or should, go towards paying back your student loans and reducing your overall debt.

So the biggest question becomes: which student loans should I pay off first?

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. 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 pay back your loans and still have enough to pay towards rent, groceries, utilities, and transportation.

While it may seem insurmountable, with an effective plan you will be well on your way to having your loans 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 deciding which student loans to pay off first and make a smart loan repayment plan based on that. You’ll be glad you did.

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

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.

Here’s what you need to do.

  1. Keep aside the money you need to make the minimum monthly repayment
  2. From the balance money, keep aside what you need for your rent 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.

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Pay Off Your Smallest Student Loan First

If comparing interest rates and making elaborate payment schemes seems overwhelming to you, experts suggest using another strategy. Here you sort out your loans from small to big.

Start with the smallest student loan and pay that one off first. As you get closer to paying off the student loan, you will feel more accomplished and 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.

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. Every time you pay back any one loan fully, you have one less payment to deal with 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 than 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.

Just remember that 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.

Refinancing Your Student Loans

If the interest rate on your private student loan is just too much, you may want to consider refinancing at a lower rate. This is especially true if you have multiple loans, as it will simplify making payments and figuring out when the loan will be paid off.

If you borrowed as a student with unverifiable income, there is a good chance the interest rate on the loan would be relatively high. If you have a steady paycheck, decent credit, and enough income to afford the payments, you can probably refinance your loans at a lower interest rate. However, this may not be a good idea with federal student loans, because their interest rates are already low and repayment options are more flexible.

Before you make any decisions, talk to the lenders as well as someone who had more experience in these matters. Think it through and explore your options and do extensive calculations before deciding on how to proceed with paying off your student loans.

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*APR includes a 0.25% interest rate reduction for enrollment in automatic payments.

**Interest rate reduction of .25% for automatically withdrawn payments from any designated bank account (“auto debit discount”). Auto debit discount applies when full payments (including both principal and interest) are automatically drafted from a bank account. The auto debit discount will continue to apply during periods of approved forbearance or deferment if the auto debit discount was in effect at the time of receiving the forbearance or deferment. Auto debit discount will remain on the account unless (1) the automatic deduction of payments is canceled or (2) there are three consecutive automatic deductions returned for insufficient funds at any time during the term of the loan.

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