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According to the latest data from the College Board, 55% of bachelor’s degree recipients from a four-year institution graduated with $28,400 in student debt. In reality, however, that five-figure average is often a combined balance of smaller student loans across multiple years of education.
This mix of student loans typically carries different interest rates, terms and repayment options. To avoid prolonging your student debt payoff or potentially paying more in interest than you have to, figure out which student loans to pay off first.
Consider Your Loans Before Setting Your Strategy
Before deciding on the most effective payoff strategy for your student loans, you’ll need to know the features of each loan you owe.
Loan Type
Your student debt is made up of either federal and private loans, or a mix of both.
Private loans come with varying terms and repayment details, depending on the lender. Student loans provided by the federal government are more standardized, but the exact terms depend on the type of federal loan you have.
You may have one or more of the following federal student loans:
- Direct subsidized loans: While in school, during your grace period and in the event of deferment or forbearance, interest that accrues on subsidized loans is paid by the government.
- Direct unsubsidized loans: In contrast to subsidized loans, you’re required to pay back all interest that accrues on unsubsidized loans. This includes charges incurred during school, your grace period, deferment and forbearance.
- Direct PLUS loans: PLUS loans are available for graduate students or parents of undergraduate students. Like direct unsubsidized loans, interest accrues on PLUS loans as soon as funds are disbursed, and borrowers are responsible for all interest charges.
- Direct consolidation loans: If you’ve chosen to consolidate your existing federal student loans, a direct consolidation loan simplifies your repayment experience. Interest that accrues on the loan is also unsubsidized, so you’re responsible for paying all interest charges.
Interest Rate
Federal direct loans all have fixed interest rates. Whatever the loan’s interest rate was when you borrowed the funds, that interest rate will stay the same throughout the life of the loan.
Private student loans, on the other hand, are offered as fixed- or variable-rate loans. Some lenders offer one option while others offer both.
A fixed interest rate provides the peace of mind of having the same payment month over month. Variable rates can fluctuate over time, depending on market conditions. While variable rates can be advantageous when rates are low, there’s always a risk of the rate increasing during the repayment period.
When deciding which student loan to pay off first, take note of whether your loans have fixed or variable rates, in addition to the rate itself. A higher interest rate means you’ll spend more money over time—depending on your financial goals, you might choose to prioritize paying off high-interest loans first, for example.
Repayment Options
In addition to loan type and interest rate, a third consideration when choosing which student loans to pay off first is your repayment plan.
A longer repayment term can reduce your monthly payments, but you’ll pay more interest since it will take you longer to pay off. A shorter term means you’ll pay off your student loan faster, but your monthly payments will be higher.
Also, learn about the different repayment plans available for each loan you’ve borrowed. Federal student loans, for example, offer income-driven repayment plans that can reduce your monthly payment to $0 per month, if your income qualifies. Private loans typically don’t offer income-driven repayment options, but your lender can tell you about your options if you’re having trouble paying your loan.
3 Strategies to Pay off Your Student Loans
Once you’ve gathered all the details for each of your student loans, it’s time to choose a payoff strategy based on your financial goals. Below are three strategies that focus on different objectives.
1. Pay off Private Loans First
Best for: Borrowers with variable-rate private loans
Private loans typically carry higher risks than federal debt. They don’t offer the generous features that federal loans provide, such as income-driven repayment, forgiveness plans and more flexible forbearance options. Private loans might also come with fluctuating variable rates that have climbed since you first borrowed.
To pay off your private loan debt first, consider refinancing private student loans if you can qualify for a lower rate. A student loan refinance might offer the chance to secure a fixed, low-interest rate that saves you money over time. As you make payments toward the refinanced private loan, continue making minimum payments toward your federal loans to keep them in good standing.
2. Pay off the Highest Interest Rate First
Best for: Borrowers looking to save the most money on interest fees
Paying off your high-interest debt first (also known as the debt avalanche method) can save you big bucks on interest charges—though it can take a while to see your progress. To start, make a list of all your student loans and identify the loan with the highest interest rate, regardless of whether it’s federal or private. Allocate any extra funds you have available toward an extra monthly payment on this loan while making the minimum payments on your other debts.
Continue with this payment approach until you’ve paid off the highest-interest loan in full. Then, do the same for the next-highest interest rate on your student loan list, and so on. This strategy helps you spend less on your degree overall.
3. Pay off the Smallest Balance First
Best for: Borrowers who are motivated by seeing quick progress
By paying off your smallest-balance loan first (commonly known as the debt snowball method), you can achieve small wins quickly. That can encourage you to continue toward your goal of being debt free.
After making the minimum monthly payment on all your student loans, identify the student loan with the lowest balance. Put any extra cash toward an additional monthly payment on this loan.
When you’ve fully paid the smallest-balance student loan, direct your extra money toward your next-smallest loan. You’ll pay off your small, individual loans faster, keeping you inspired to work your way through all your outstanding student debt.
Bottom Line
Deciding which student loans to pay off first will look different for each borrower. How you get your student debt to zero depends on many factors, including your loan type, its terms and features and your overall financial goals.
