Which Student Loan Should I Pay Off First?

Michael Lux Repayment, Student Loan Blog 0 Comments

Paying the minimum on all of your student loans is an expensive way to pay off debt. In the long run, you will spend a fortune on interest.

If you can pay a little extra towards your student loans, you want to get the most out of every dollar. What is the best way to do this?

Step number one is to pick one loan to attack. By selecting one loan to attack, you can eliminate an entire monthly payment and free up more money to attack your next loan. Attacking one loan is far superior to paying extra on several loans — just make sure you don’t miss any payments.

As loans are eliminated, debt elimination gets easier and easier. You just need to decide on that first loan…

Perks of Eliminating the Highest Interest Rate Loan

If you do the math, eliminating the highest interest loan will always save the most money in the long run. As debt gets eliminated, your average interest rate gets lower and lower. The more money that is being applied to the principal, the better you are doing.

In many cases, knocking out the high-interest loan first is the best option. However, there are a couple of notable exceptions to the general rule…

When Paying off the Lowest Balance Loan Makes Sense

This route is best for people who need an easy win. Think of it as going after the low hanging fruit. Paying off the lowest balance loan first is all about psychology.

Getting rid of any student loan is a big deal. You have a little extra money each month, debt is eliminated from your credit report, and you are one step closer to being debt-free. Going after the lowest balance student loan makes that first step happen the fastest.

Knocking out a low balance loan might also make sense for borrowers looking to improve their debt-to-income ratio to qualify for a mortgage. Putting a dent in a loan balance won’t help qualify for a home loan, but eliminating a loan from your credit report will help the cause.

Get Rid of Private Loans First

For most, paying off the lowest balance loan or highest interest rate student loan is the ideal way. However, there are a couple of factors that can’t be ignored when putting together your plan.

Student Loan Forgiveness and Other Federal Perks – If you have private loans in addition to your federal loans, paying off the private loans first is a smart move. Unlike private loans, federal loans offer borrower protections like income-based repayment or public interest student loan forgiveness. These programs protect borrowers if they lose their job, or offer perks for borrowers who end up working certain jobs. Because there is real value to these programs, going after the private loans first often is the smart move. Borrowers can determine which loans are federal by visiting the Department of Education’s Student Aid website.

Private Refinance Options – One of the shortcuts to knocking out student loans is refinancing. Borrowers with a solid income can credit score can lower their student loan interest rate to about 2% by refinancing. When private loans are repaid at much lower interest rates, borrowers can focus on other financial goals such as retirement or buying a house.

Other Factors to Consider

  • Cosigners – If you have two loans and can’t decide which one to attack first, your cosigner may appreciate you eliminating the debt that they are attached to. Even if you are making all of your payments, 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.

The Need to Pick a Strategy

Just paying the minimum on all of your student loans is a very expensive way to pay off debt. Picking a plan and aggressively attacking your debt will get you to debt freedom much faster.

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