How to decide which student loans to pay off first

If you have multiple student loans, you may feel stressed about how to prioritize them. Having a loan repayment plan can help you knock out debt quicker.

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Learn which student loans to pay off first based on your financial goals and other factors. (Shutterstock)

If you have more than one student loan, you may be wondering which one to pay off first. The answer depends on what type of loans you have, how much you owe, and your financial situation. 

Some borrowers focus on the loan with the highest interest rate first, while others prefer to start with the loan with the smallest balance to knock it out faster. The answer isn’t the same for everyone, and what works for someone else may not be the right option for you. 

Here’s what you need to know about prioritizing your student loan repayment and some strategies you can use to eliminate your debt sooner. 

Refinancing your student loans is one option that could help you pay off your student loans faster. Visit Credible to compare student loan refinance rates from various lenders, all in one place.

Strategy 1: Pay off private student loans first

If you have federal and private student loans, consider paying down your private loans first. Private loans often have higher interest rates than federal loans, so repaying them first could save you money in the long run. Continue to make minimum monthly payments on your federal loans, but put any extra available funds toward your private student loans. 

Repayment options are somewhat limited with private student loans, and private lenders generally offer fewer protections than federal student loans. If you have federal student loans, you have access to benefits like loan deferment and forbearance, as well as loan forgiveness programs. Private lenders are less lenient when borrowers face hardships or need to make adjustments. 

If your credit is good, or you have a cosigner with good credit, you can also refinance your private loans to get a lower interest rate, which could help you pay them off quicker.  

Strategy 2: Prioritize the loan with the highest interest rate

If you want to maximize your savings when paying off student loans, start with the one that has the highest interest rate. Federal student loans come with fixed rates set by the government. Private lenders set interest rates based on your credit and other factors, and they’re often higher. Commit to tackling your loan with the highest interest rate first.

By paying off the loan with the highest interest rate, you reduce the amount of interest you’ll pay on the loan beyond the principal balance. This is called the debt avalanche method, and it’s a good option if you want to pay the least amount of money in the long run.  

For example, if you had a $12,000 student loan at 5% interest and paid it off over 10 years, you’d pay $3,273 in interest for a total payment of $15,273. If you made enough extra payments to pay that same loan off in seven years, you’d only pay $2,247 in interest — a savings of $1,026. 

Strategy 3: Repay the smallest loan first

Another repayment option you may want to consider is the debt snowball method. This strategy prioritizes paying off the student loan with the lowest balance first. 

To do so, make minimum monthly loan payments on your other loans and put any extra money toward the one with the lowest balance. Once you’ve paid that loan off, move on to the loan with the next-lowest balance, rolling over the funds you were paying on the previous loan. Continue to pay off your loans and roll over the funds, forming a snowball effect that continues to grow until you’ve paid off all your loans. 

The debt snowball builds up to larger payments on later loans, and paying off a loan quickly creates a small win. This can provide motivation during the repayment journey.

Credible makes it easy to compare student loan refinance rates from multiple lenders in minutes.

What’s the best way to pay off your student loans?

It’s important to choose the strategy that works best for your income, amount of student loan debt, and goals. Here are some tips to consider when choosing the right repayment plan for you: 

Take inventory of your loans

Before you can determine the best way to pay off your student loans, you need to take stock of your debt. Write down the details for each loan, including your: 

  • Lender/servicer
  • Loan balance
  • Interest rate
  • Monthly payment amount

Once you’ve done this, you’ll have a better idea of where you stand and the right way to approach your student loan debt. 

Explore income-driven repayment plans 

If you have federal student loans and are currently on the 10-year Standard Repayment Plan, consider switching to an income-driven repayment (IDR) plan. Since these plans are based on your income and family size, you could significantly lower your monthly loan payments. 

You have four IDR plan options:

  • Pay As You Earn Repayment Plan (PAYE Plan)
  • Revised Pay As You Earn Repayment Plan (REPAYE Plan)
  • Income-Based Repayment Plan (IBR Plan)
  • Income-Contingent Repayment Plan (ICR Plan)

Keep in mind, though, that an IDR plan will generally extend the amount of time it’ll take to pay off the loan — which, in turn, means you’ll pay more interest on the loan.

Use a student loan calculator

Calculate your total student loan interest with a student loan interest calculator. This will tell you how much interest you’ll pay on your current repayment plan and how much you can save if you pay off your loan sooner or refinance to a lower interest rate. 

Which federal student loan should you pay off first?

Another factor to consider is whether your federal student loan is a Direct Subsidized Loan or a Direct Unsubsidized Loan. A Direct Subsidized Loan won’t start accruing interest until after the six-month grace period following graduation or leaving school. The Department of Education pays the interest on the loan while you’re in school. 

With a Direct Unsubsidized Loan, you’re on the hook for any interest charges, which start accruing from the time the loan is disbursed. If you don’t make interest payments during school, the interest accrued while in school will eventually capitalize, which means it gets added to your loan principal. In other words, you’ll end up paying interest on your interest. 

Because they start accruing interest first, you should generally pay off any Direct Unsubsidized Loans before Direct Subsidized Loans. 

What to consider when paying off student loans 

The type of student loans you have isn’t the only factor you should think about when making a repayment plan. Here are some other things to consider as you move forward with repaying your student loans: 

Refinance your student loans

Refinancing your student loans could help you save money and potentially pay off your loans faster. Many lenders let you prequalify without negatively affecting your credit score, so it’s worth prequalifying with a few different lenders to compare rates and terms. 

Refinancing can save you considerable money on interest over the life of your loan, and give you just one student loan payment to manage. You can refinance private student loans or a mixture of private and federal loans. Just keep in mind that when you refinance federal loans into a private loan, you lose access to federal protections like forbearance and income-driven repayment plans. 

With Credible, you can compare student loan refinance rates from different lenders without affecting your credit.

Address other forms of debt 

In some cases, paying off your student loans first may not be the right way to go. Student loans tend to have lower interest rates than other forms of debt. If you’re carrying credit card debt, you may want to tackle those bills — which cost you more interest — before putting extra funds toward your student loan debt. 

Like most financial decisions, the choice of how or when to pay off debt depends on your situation. Consider all factors to see what makes sense for you. 

Avoid overextending yourself financially

However you choose to pay off your student loans, protect yourself by making sure you have enough saved in an emergency fund to cover any unexpected expenses that may arise. Create guidelines for yourself on what constitutes an emergency and reserve your emergency savings for those types of expenses. Don’t use emergency funds to pay off student loans or other monthly expenses, if possible.