You’re finally able to pay off your student loan more aggressively. But with different interest rates across multiple loans, how do you decide which one to pay off first?
It’s an important question – making the right payoff decision can save you thousands of dollars in interest and get you out of debt faster.
Here’s a detailed guide on choosing which student loan to pay off first.
How to Choose Which Student Loan to Pay Off First?
Here are key factors to consider to help you decide on which student loan to pay off first:
1. Assess Your Loans and Interest Rates
Start by laying out all your student loans and their key details side-by-side, giving you a full picture of what you owe.
For each loan, note the following:
- Remaining balance – how much you still owe on the loan
- Interest rate – the annual percentage rate charged on the unpaid balance
- Loan type – federal or private
- Repayment status – in deferment, forbearance, etc.
Organize the loans from highest interest rate to lowest interest rate. This will give you a prioritized order to follow as you make your payoff decision.
Federal student loans usually have fixed interest rates, while private loans often have variable rates.
Use the current rate when determining your order for variable-rate loans, but remember to recheck it periodically.
2. Choose the Loan With the Highest Interest Rate
In most cases, the loan with the highest interest rate is the best one to pay off first using the “debt avalanche” approach.
Focusing your extra payments on the loan with the highest interest rate reduces the total interest you pay over time.
Let’s say you have:
- Loan A with a $10,000 balance at 8% interest
- Loan B with a $15,000 balance at 5% interest
You have $500 monthly in extra payments you can put toward your loans above the monthly minimums.
If you put the $500 toward Loan A, you pay it off faster, reducing the interest you pay over time.
Paying more toward high-interest debt saves money. But consider other facts in a couple of cases.
3. When the Highest Rate Loan Has Special Perks
Some federal student loans, like Direct Subsidized Loans, have perks you’d lose by paying them off early, like subsidized interest.
During deferment periods, the government covers the interest on subsidized loans, so it doesn’t capitalize.
In this case, you may want to put extra payments toward a lower-interest loan first to keep the subsidized loan and its benefits as long as possible.
Do the math to see if the long-term interest savings outweigh the benefits.
4. When Cash Flow Is More Important Than Interest
The “debt snowball” method prioritizes small-balance loans for psychological motivation. Paying off a few small loans quickly can give you the momentum to tackle the bigger ones.
If knocking out some quick loan payoffs would provide a mental boost and free up monthly cash flow faster, paying off small loans first could make sense.
Again, run the numbers – it often costs more interest over time. So, in most cases, pay the loan with the highest interest rate first. But remember to factor in special loan perks and psychological motivation, too.
5. Should I Refinance First?
Before deciding on a payoff order, consider whether refinancing could lower your interest rates.
When you refinance student loans, you take out a new loan at a lower rate to pay off the existing loans.
Refinancing saves money by reducing interest rates – sometimes dramatically. Typical student loan refinancing rates are 4-8%, compared to higher federal loan rates.
Refinancing has specific eligibility requirements based on income, credit score, and total student loan debt.
If you qualify to refinance, use a student loan refinancing calculator to determine potential savings.
If you can reduce your interest rates by refinancing, you should do that before making extra payoff decisions. Then, re-assess your loans and order.
6. Adjust Payments as Balances Change
As you pay off loans in full, revisit your list and determine the next highest interest rate loan to tackle.
Don’t just continue making extra payments on a loan already paid off when you likely have another with a higher rate.
For example, you start by paying off Loan A at 8%. Once that’s paid off, Loan B is the highest rate at 5%, which becomes the focus of your extra payments.
When interest rates are equal across multiple loans, first target the loan with the lowest balance. Knocking out full loan balances frees up cash flow faster.
7. Automate Payments for Convenience
To implement your targeted student loan payoff plan, automate payments for convenience.
Most student loan servicers allow you to set up automatic monthly payments from your checking account above the minimum due.
You can schedule automatic payments for fixed extra amounts or percentage increases.
Automating your payments ensures the extra money is sent without you remembering to make monthly payments manually.
As you pay off loans, update your automated payment amounts on the remaining loans. Streamlining the process helps you stick to your payoff strategy.
8. Reevaluate Every Year
Your financial situation, interest rates, and loan balances change over time. Set a reminder to reevaluate your student loan payoff strategy every year.
When it’s time for the annual review, create an updated list of remaining loans, interest rates, and balances. See if any loans now have a higher rate than you are targeting. Verify you still qualify for any rate discounts.
Refinancing your loans is an option annually as well if you now meet eligibility criteria or could get a better rate. Doing a quick optimization each year keeps your payoff plan on track.
Committing to consistently directing extra payments to your high-interest loans each month is the key to paying them off faster. Automate payments so you don’t forget or get distracted.
Stick to targeting the highest interest rate loan first in most cases. Paying off high-rate debt first saves the most money over time. Stay focused on that top-priority loan until it’s paid in full.
Keeping extra payments on a schedule means you’ll pay off your student loans faster and reduce the total interest paid. Now get cracking on knocking out that high-interest debt!
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