Navigating the repayment process after graduation can feel overwhelming, especially when juggling multiple student loans. Many graduates wonder which student loans to pay off first to ease their financial burden. Understanding the different types of loans and creating a strategy can make this task more manageable, and can save you money in the long run.
What are the different types of student loans?
When it comes to student loans, they generally fall into two main categories: federal and private.
- Subsidized loans: These are federal loans where the government helps out by covering the interest while you’re in school and during your grace period. This means you won’t see your balance grow during that time, which can save you money in the long run.
- Unsubsidized loans: Unlike subsidized loans, these federal loans start building interest right away—even while you’re still in school. This means your balance can increase over time, making it more expensive in the long term.
- Private loans: These loans come from banks or private lenders and tend to have higher interest rates. They also offer fewer repayment options and typically don’t provide perks like loan forgiveness or income-driven repayment plans.
Which student loan should I pay off first?
Deciding what student loans to pay off first requires a clear understanding of how each loan type affects your financial situation. To simplify, here is a suggested ranking of the types of student loans to prioritize, with rank 1 being the highest priority:
1. Private Loans
It’s usually a good idea to focus on paying off private student loans first. These loans tend to have higher interest rates and fewer protections for borrowers. Paying them off sooner can help you avoid spending extra on interest. Plus, private loans don’t offer perks like income-driven repayment plans or loan forgiveness, so there’s no real benefit to keeping them around longer than necessary.
2. Unsubsidized Loans
If you’re wondering, “Should I pay off unsubsidized loans first?” the answer is usually yes. Unsubsidized loans start accruing interest while you’re still in school, meaning the longer they remain unpaid, the larger the balance grows. Tackling unsubsidized loans early can prevent your debt from snowballing, which helps in reducing the overall amount you’ll need to repay.
3. Subsidized Loans
Subsidized loans should generally be the last to pay off among the federal loan types. Because they don’t accumulate interest while you’re in school or during deferment, they are easier to manage financially. If you’re still deciding which loan to pay off first, subsidized or unsubsidized, it’s better to focus on the unsubsidized loans to avoid unnecessary interest growth.
What do you need to consider when deciding which to pay off first?
Before deciding which loans to prioritize, there are several factors to consider, including your financial situation, interest rates, and loan terms.
1. Interest Rates
When deciding which loans to pay off first, it’s crucial to consider the interest rates. Loans with higher interest rates end up costing you more in the long run, so it’s often best to tackle those first. Using the debt avalanche method, where you focus on paying off the loans with the highest interest rates first, can help you save money by cutting down on the total interest you’ll pay.
2. Loan Benefits
Federal loans come with extra benefits compared to private loans. These include options for deferment and forbearance, income-driven repayment plans, and even loan forgiveness programs. If you’re struggling financially or anticipate needing these benefits, you may want to hold off on paying federal loans too quickly, particularly subsidized loans.
3. Loan Balance
Another consideration is the total amount of each loan. The debt snowball method focuses on clearing off smaller loan balances first. While this may not save you as much in interest, it can provide quick wins, which help maintain motivation.
4. Financial Goals
Your broader financial goals also play a role in deciding which loans to pay off first. If you have credit card debt with high interest rates, it might be wiser to address that first before concentrating on your student loans. Prioritizing based on your overall financial picture will help ensure you’re making the best decisions for your future.
Additional tips for paying off student loans
Once you’ve figured out what student loans to pay off first, there are additional strategies to help accelerate the process and reduce financial stress.
1. Create a Budget
To manage your debt effectively, it’s important to understand your income and expenses. Putting any extra money towards your student loan payments can help you pay them off more quickly.
2. Use Windfalls Wisely
When you get extra money, like tax refunds, bonuses, or gifts, think about using some of it to pay down your loans. These additional payments can make a big difference in reducing your debt over time.
3. Consider Refinancing
For those with good credit, refinancing private loans might help secure a lower interest rate, reducing your monthly payment or overall loan cost. Keep in mind that refinancing federal loans will convert them into private loans, so you’ll give up federal protections.
4. Automate Payments
Setting up automatic payments can make sure you never miss a due date. Plus, some lenders offer lower interest rates if you use automatic payments. It’s a simple way to keep your repayment plan on track.
5. Explore Loan Forgiveness
If you’re employed in certain fields, such as public service or education, you may qualify for federal student loan forgiveness programs. Investigating these options can reduce the amount you owe over time.
Choose the right student loan to pay off first
When deciding which loan to pay off first, it’s important to look at the interest rates, loan types, and your financial goals. Typically, private loans and unsubsidized federal loans should be your top priority because they tend to cost more and build up interest faster. If you’re wondering, “Should I pay off subsidized or unsubsidized loans first?” the general rule is to start with unsubsidized loans since they collect interest while you’re still in school.
Creating a plan that fits your situation will make it easier to tackle your student loans. Whether you focus on high-interest loans or smaller balances, the key is to stick to a repayment strategy that works with your budget and goals. Having a solid plan can ease the stress of managing multiple loans and help you get on the road to being debt-free.