Dealing with multiple student loans in repayment can be overwhelming and scary.
Fortunately, many resources make it easier to repay several lenders at the same time. Combine the right resources with a smart strategy, and most borrowers can reasonably expect to save thousands of dollars on their student debt.
Some of the tools and tips listed below may be old news. Others might be new information. The goal of this article is to show how all of these puzzle pieces fit together.
Separate your multiple student loans into two groups: Federal and Private
Federal student loans have a ton of perks for borrowers. Programs like student loan forgiveness and income-driven repayment ensure that borrowers can afford their student loan bills.
However, the federal perks can also be helpful for the borrowers who can reasonably afford their payments. Getting a lower monthly payment on one loan could mean a borrower can attack a higher interest loan.
Private loans offer less flexibility. As a result, the planning and strategy for private student loans will look much different.
How do I know if my loans are federal? The Department of education keeps a database of all federal student loans. Borrowers can access the database to get a complete accounting of their federal debt. If your debt isn’t in the federal database, it is private.
Refinance Private Loans
With private student loans, borrowers can’t look forward to loan forgiveness or help from their lenders.
The key to eliminating private student debt is battling interest. All student loans generate interest daily. Borrowers with a higher-interest loan will often see interest consume the majority of their student loan payment. In many cases, only a small fraction of the monthly payment lowers the loan balance.
The best shortcut to address interest is student loan refinancing. When a borrower refinances, a new lender pays off the old student loans in full. The borrower then repays the new lender according to new loan terms.
Refinance lenders like Splash and SoFi are willing to offer lower interest rates because a college graduate with a job is much less of a credit risk than a student. When someone is more likely to pay off a loan, the lender can charge a lower interest rate and still profit.
A side benefit of refinancing is that the multiple private student loans in repayment become one new loan. This means fewer lenders to track and less potential for headaches.
Sherpa Tip: Only refinance the loans that you can improve. If you have loans at 3%, 5%, and 9%, and a refinance lender is only willing to refinance at 4%, don’t include the low-interest loan. Borrowers can pick and choose the loans included in a refinance.
Sign up for the lowest possible payment on all loans
Most borrowers only seek out lower monthly payments when they cannot afford their bills.
This is a mistake.
All borrowers should go after the lowest monthly payment possible on all of their loans. This doesn’t mean the borrowers should only pay the minimum. Asking for lower monthly payments is all about flexibility.
Suppose a borrower can spend $300 per month on their student loans. If the minimum payment on their multiple loans in repayment adds up to almost $300, there isn’t much money left each month. However, if this borrower can get lower monthly payments on some of their loans, it could free up an additional $100 per month. That $100 per month could be used to attack the loan with the highest interest rate.
In short, borrowers can spend the same amount of money each month but eliminate their debt faster.
The Department of Education’s Student Loan Simulator is an excellent tool for reviewing different federal loan options. Borrowers with private loans will want to contact their lender directly.
Attack one student loan at a time
Paying just a little bit on all of your student loans is inefficient.
The most effective way to eliminate multiple student loans is to attack them one at a time. Once one of the loans is eliminated, the borrower frees up some cash each month to attack another loan. This pattern can repeat until all of the debt is eliminated.
For those curious about the math behind this strategy, check out this analysis.
This approach is the best option for several different reasons. For starters, it can be the most economical. Eliminating high-interest debt first will save money in the long run. Second, it can build momentum. Paying off the first loan will be the hardest, but each subsequent loan gets a bit easier. When you see your hard work paying off, it will encourage you to keep up the good work. Finally, eliminating entire loans is great for financial flexibility. Wiping loans off your credit report will make it easier to buy a house, and give you flexibility when you have unexpected bills.
Picking the one loan to eliminate
In some cases, it might be hard to know which loan should be eliminated first.
Sadly, there isn’t a one-size-fits-all approach available. Instead, there are a few different strategies worth considering.
- Pay off the highest interest rate loan first – Repaying student loans is a constant battle against interest. Eliminating the loan with the highest interest rate is the fastest path from an accounting perspective, assuming student loan forgiveness is not part of the equation. Most borrowers will want to pay off the loan with the worst interest rate first.
- Pay off the private loans first – Borrowers chasing after federal student loan forgiveness will definitely want to go with this approach. Those who are worried about future financial hardships may also want to select this approach due to the federal borrower protections. Private loans are riskier than federal loans, so it makes sense to get rid of them first.
- Eliminate the loan with the smallest balance – There are two reasons to go with this approach. First, it helps from a psychological standpoint. Take an easy win and build momentum as you start to attack loans with a larger balance. Second, it could make sense in a homebuying scenario. Getting a smaller student loan off your credit report could increase your ability to qualify for a mortgage.
Those on the fence about their options should check out this article on deciding which student loan to pay off first.
How to stay motivated in your repayment battle against multiple student loans
The repayment of multiple student loans does not happen overnight.
Having a great month or even a great year is helpful. However, it is the sustained dedication over several years that makes the biggest difference.
Staying motivated during all this time can be a challenge.
One way to track progress and stay motivated is to reward yourself along the way. Each time a loan is eliminated, celebrate with a dinner or a treat. These rewards can be big or small, they just need to provide an incentive. The door of student debt is one of the best examples of putting this motivating strategy into action.
Refinancing private student loans is a good first step to the repayment of multiple student loans. It lowers interest rates and makes managing monthly payments easier.
However, borrowers shouldn’t stop with a single refinance.
Refinancing initially works because a borrower with a degree and a job is less of a credit risk than a college student. Less risk means that the lender can offer a lower interest rate.
As time passes, borrowers may again become more attractive to lenders. If you get a raise or eliminate some old debt or negative items from your credit report, it might be time to refinance again.
There is no limit to the number of times you can refinance your student debt. Additionally, there is no cost to refinancing your student loans, other than the time it takes to fill out an application. Generally speaking, if you can get a better deal on a new loan, it makes sense to refinance.
- Track down your debt – A credit report is often the best way to find private student loans. The Department of Education will have complete records on federal student loans.
- Refinance the private debt – Refinancing federal loans is an option, but it comes with major risks. Borrowers with private loans should review the many lenders on the refinance marketplace and chase after the best interest rates available.
- Sign up for lower monthly payments – Private loans have fewer repayment options, but federal loans have so many options that it can be confusing. Use the Department of Education Loan Simulator to find the best option.
- Keep at it! – Almost all borrowers will face some significant roadblocks on their way to debt elimination. The only way to successfully repay multiple student loans is to be relentless. It may be hard, but it can be done!