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Why Most* Borrowers Should Repay Private Student Loans First

*There are a few cases where knocking out federal student loans first makes sense. However, the majority of borrowers will benefit from prioritizing eliminating private loans.

Written By: Michael P. Lux, Esq.


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Interest rates, monthly bills, and loan balances are all worthy considerations for deciding which student loan to pay off first. However, the simplest and most logical strategy is usually to focus on private loans before trying to eliminate federal loans.

The reasoning here is pretty simple: private student loans are less flexible and, therefore more dangerous to the average borrower.

Federal loans offer forgiveness opportunities, income-driven repayment options, and interest freezes during times of crisis. Private loans can’t match these borrower protections.

We see exceptions to this basic rule in limited circumstances. Borrowers looking to buy a house might be better off focusing on federal loans. Likewise, financially secure borrowers focused entirely on debt elimination may determine that eliminating their government loans first is the optimal choice.

Debt Elimination and Loan Payoff Order Basics

Before we jump to specific situations and examples, it’s critical to clarify one point.

When we talk about eliminating one loan before others, it doesn’t mean entirely ignoring some loans. Missing a monthly bill can mean late fees, adverse credit reporting, and worse. Skipping out on any student loan bill should be reserved for desperate situations.

The discussion of loan prioritization is about determining where extra payments are best allocated. If your student loan bills total $400 per month and you can afford to pay $500 per month towards your debt, which loan should get the extra $100?

Our goal today is to make that extra $100 go as far as possible.

The Classic Strategy: Focus on the Loan with the Highest Interest Rate

If you do the math, eliminating the highest-interest loan will always save the most money in the long run — assuming that forgiveness and outside help isn’t available.

When you pay off high-interest loans first, as debt gets eliminated, your average interest rate gets lower and lower. The more money that gets applied to the principal, the better you do.

I usually don’t advise this classic strategy because it misses the big picture. If all your loans had the same terms and conditions but different interest rates, knocking out the high-interest loans first would save the most money. The problem is that loans don’t all have the same terms and conditions. Because federal loans have better terms and conditions, it is often advisable to leave that for last.

However, there are times when knocking out the loans with the highest interest rate first is best.

The classic example is someone with a good job and job security. Earning a good income alone isn’t enough — if your solid income can quickly disappear, you don’t want private loans hanging over your head. However, if your long-term financial outlook is strong, it might be a question of eliminating the debt as fast as possible. You might not care about loan forgiveness or income-driven repayment.

In this limited circumstance, tackle the loans with the highest interest rate, as it will likely save the most money in the long run. Borrowers in this situation can also leverage their earning power into lower interest rates using a student loan refinance.

Applying New School Psychology to Debt Elimination

Not all borrowers choose to pay off their highest-interest loan first. Some choose to pay off the loan with the lowest balance.

The idea behind this strategy is that knocking out a small loan gets the borrower an easy win. Fresh off success, the borrower is more likely to stick with their plan to pay off their loans aggressively.

This strategy isn’t the most efficient from an accounting perspective, but when you factor in the psychological benefits, at least one study found that it works better.

The problem with this approach is the same as the problem with paying off the highest interest rate loan first: neither strategy addresses what happens if you lose your job or get a pay cut.

Why Knocking Out Private Loans First is Best

Under ideal circumstances, whether your loans are federal or private doesn’t matter. Unfortunately, most of us will face financial circumstances that are less than ideal at one point or another.

If you are unemployed, dealing with federal student loans is dramatically different than private loans. In a financial crisis, federal borrowers can cut their monthly federal loan payment to $0. Additionally, they can get a substantial interest subsidy. Finally, all that time still counts towards the various student loan forgiveness programs.

The extensive federal protections are why I advise most borrowers first to eliminate their private loans. It might not be the best strategy from an accounting or psychological perspective, but it’s the one that will help borrowers sleep best at night.

Sherpa Tip: Another perk of saving federal loans for last is that it allows borrowers to maximize any new federal programs that might be created in the future.

For example, the $10,000 forgiveness program that was recently announced seemed highly unlikely just one year ago. The borrowers who focused on private loans first may not receive up to $20,000 of federal loan forgiveness.

Likewise, during the Covid-19 pandemic, federal borrowers had their interest rate lowered to 0%. The Covid-19 relief is something that private lenders can’t offer.

Buying a House can Change Repayment Strategy

Student loans can wreak havoc on a mortgage application.

Student debt can impact your credit score. However, the big consideration for homebuyers with student loans is usually the debt-to-income (DTI) ratio. Mortgage companies look at your monthly DTI to determine how big of a mortgage payment you can afford.

Thus, if you are trying to buy a house, sometimes it makes sense to pay off the smallest loan completely. Other times the best approach is to knock out the loan with the highest monthly payment.

Another strategy for those trying to qualify for a mortgage is to request lower monthly payments on their loans.

Repayment strategy for borrowers looking to secure a mortgage gets complicated quickly. There isn’t a simple answer in this situation.

Advanced Guidance for Homebuyers: The ideal approach will depend upon several factors unique to each borrower. The comprehensive guide for student loans and mortgages should help you identify the repayment strategy that maximizes your chances of mortgage approval.

Classic Debt Elimination Strategies Don’t Work for Student Loans

Many finance gurus like to get people started on easy-to-understand debt elimination strategies.

The problem with one-size-fits-all approaches is that student loans are far more complicated than most other debts.

Student loan terms are frustratingly harsh at times. In other situations, they may seem quite generous.

Don’t be afraid to pick the repayment strategy that works best for your student loans. The first loan you pay off should be the loan that is either the most significant obstacle or the biggest threat to achieving your financial goals. For most borrowers, that will be the private loan with the highest interest rate.

Tips For Borrowers Unsure of What Loan to Attack First

If you are still uncertain about what loan to pay off first, there are a few other factors that might impact your decision:

  • Cosigners – Your cosigner may appreciate you eliminating the debt they are attached to. Even if you make all your payments on time, the student loan will still be on your cosigner’s credit report until it is paid off completely. Plus, if you encounter problems down the road, you don’t want those issues to also hurt your cosigner.
  • Getting Rid of a Specific Lender – If you have one lender that is a thorn in your paw, paying down their loan first is worth considering. Eliminating their loan means you no longer have to deal with that lender, and it means they stop profiting from your debt. That can be very satisfying.
  • Refinance – The option to refinance is a wildcard. The people who most desperately need the help usually can’t benefit, but the stronger your finances, the more a refinance can help. Some borrowers even choose to use a refinance to lower their interest rates so that they can focus on other financial goals like saving for retirement.

As of May 2024, the following lenders offer the lowest refinance rates:

RankLenderLowest RateSherpa Review
T-1ELFI5.28%ELFI Review
T-1Splash Financial5.28%*Splash Financial Review
3Laurel Road5.49%Laurel Road Review
About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

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