Which Student Loan To Pay Off First?

This article talks about the steps you can take to decide which student loan to pay off first and also the common mistakes one can make when paying off student loans. Also learn which repayment plans will be suitable for you.

Updated by Heibha Passah on 20th November 2019

As you are nearing your graduation or have already graduated, the excitement increases as to what will happen next. You’re going to be independent and looking forward to a new life. But that won’t be the case if you have student loan debt, especially if it's for more than one loan that you have to repay.

Most of the students have multiple loans that they have to repay by the time they graduate and are often confused as to which student loan to pay off first as it would be taken from different lenders having different interest rates, repayment plans, and outstanding balances. You should be really careful and try to manage your payments so that it can be less difficult for you to handle so many payments at one time.

In addition to that, if you’re a fresh graduate you might still be unemployed or not employed full time, which means that you are not earning much for now. So paying for your student loans and managing other payments can be really difficult.

You can still stay ahead of your debt even with all these burdens on your shoulders by having a strategic and effective plan in place to pay off your loans. Prior to making payments, take some time to think and decide as to which loan to pay off first and choose the best repayment plan to do so.

Table of contents

Steps to take before deciding to make payments

1 - Organize your student loans

Before deciding as to which loan to repay first, you need to find out which loans you have and all the information of each one, then organize them. You need to know the following information-

  • You have private or federal loans

  • The size of the loan

  • You have a co-signer or not on any of the loans

  • The interest rates on your loans are fixed or variable

  • What is the rate of interest

  • If you have Subsidized or Unsubsidized Loans

  • The amount outstanding on your loans

  • If your loans have various provisions attach to them like deferment, forbearance, forgiveness, and more.

2 - Find out the best repayment plan for you

After your graduation, if your loans are in deferment or have a grace period, repayment will start after that. You need to decide on a repayment plan which will work the best for you. You have different options.

Make sure to talk to your loan servicer or ask for professional help. If necessary, choose the one which will benefit you the most as choosing the wrong one will lead to you not being able to repay your loans.

For Private Loans, you can choose either a standard or graduated repayment plan. There are other lender specific plans offered to the borrowers as well. 

For Federal Loans, you have more options like standard, graduated, extended, income-based, income-contingent or income-sensitive repayment plans. Your federal loans can also qualify for the Federal Loan Forgiveness Program.

3 - Make the minimum payment on all loans

Assess all your existing debt, including credit card and other financial obligations and make sure you are paying a minimum amount for each of them.

By assessing all your debt and making minimum payments on each, you can determine the remaining balance you have and decide on which loan you can use it on.

4 - Find out if any of your debt is protected

Some student loans are protected, which means that they don’t have any interest accruing on them for a certain period.

An example of this is Subsidized student loans in which interest doesn’t accrue while you are in school or during periods of deferment. In the same way, some loans have income protection in which interest doesn’t accrue until you get a job.

5 - Find out if any of your loans have prepayment penalties

Higher Education Opportunity Act (HEOA) has made it illegal for private lenders to penalize borrowers who go for prepayment of their loans.

However, education-related personal loans or if you consolidate your student loans with other eligible loans through a personal loan, then you might be penalized.

Guidelines to decide on which loan to pay off first

1. Put private loans on priority - Private loans tend to have a lot of risks, like variable interest rates, no option of deferment or forbearance, fewer repayment options, can’t be consolidated and usually requires a co-signer. If you have both private and federal loans, make sure to pay off your private ones first as the federal loans have all the benefits which can be put to use, like using the income-based repayment plan on your for the time being, as you focus on your private loans.

2. Focus on Federal Loans - Just because you are putting your private loans as a priority doesn’t mean you should neglect your Federal Loans. Federal Loans come with a number of benefits that can be put to the best use and to your advantage.

You can make minimum payments on them until your private loans are paid off, then with the remaining amounts, you can pay off your Federal loans.

If you have only Federal loans then make sure to choose the best repayment plan that’ll help you get out of debt faster. You can choose a standard repayment plan for that, or if you are having money troubles, then you can opt for the income-based repayment plan.

3. Pay off loans with a co-signer - Your co-signer agreed to help you out and this is a huge thing they’re doing for you. If anything happens and you’re not able to pay your loans later, they might get affected. Return the favor they did for you by paying off the loans to free them of the obligation.

4. Pay off subsidized and unsubsidized loans with higher interest rates - Unsubsidized loans with high fixed interest rates have interest accruing on them. These rates will keep accruing until the time you repay them, so in order to save yourself from high amounts of debt, dispose of these loans first.

In Subsidized Loans, interest is paid by the government during the deferment or grace period. It starts accruing when the repayment period starts and you have to pay for it, so make sure to pay it off before it starts accruing, to save you from paying more later on.

5. Consolidation or Refinancing - Consolidation allows you to combine all your loans together making it convenient to make payments. You will be free of the hassle of managing multiple loans and making multiple payments.

Student loan refinancing allows you to acquire a new loan with new terms to pay off all your other loans. This would mean getting a lower interest rate on your new loan and you also have the option of either extending or reducing your repayment term.

But both of these methods come with a price. You could lose out on all your federal loan benefits. The interest rates, if higher than previous rates will not be a better choice, and if you’ve been making qualifying payments for a while, then the new repayment period means you lose out on all this and have to start over. Also, refinancing requires you to have a good credit score and a stable employment history, so if you don’t have any of that then it won’t be an option for you.

6. Make a Plan - Now that you know which loans to pay off first, you can have a strategic plan by making use of various methods to release yourself from debt. You can even mix and match them as per your convenience.

Debt Snowball Method - If you are focused on disposing of first your student loans which have the lowest amount, irrespective of the interest rates, then you are using the Debt Snowball Method. This allows you to pay off your debts quickly but doesn’t result in huge savings. So, it is used by those borrowers who feel motivated by the quick outcome of their actions.

Debt Avalanche Method - If you want to save big money and focus on paying off those student loans which have the highest interest rates first, then you are using the Debt Avalanche Method. It is used with a basic idea that loans with higher interest rates will accrue more interest and cost more in the longer period, hence, paying them first will help save a lot of money.

Using any of the above methods, you can choose which loans to dispose of first. Along with the above methods you can also use the following simultaneously to help you keep on track-

Baby Steps - These are the 7-step plan which was created by Dave Ramsey to achieve debt freedom. You can look them up and try implementing them.

Spending Diet - This method limits your spending on things where you don’t need to $100 per month. It is created by Anna Newell Jones.

Confused about college tuition? Learn more on student loans

Tips to pay off your student loans faster

  • Set up an emergency fund where you save your money to use during any uncertain event

  • Pay off your credit card balances first as they have the highest interest rates

  • Any additional amount will be used to pay off the principal, not the interest as it’ll help lower the amount of future interest

  • Make payments at an amount higher than the actual, if you have extra funds

  • If really necessary, you can ask your parents or any family members to help you out to pay your loans faster.

Common mistakes to avoid when repaying student loans

1. Losing track of paying loans - Keep track of your loan information as many of the borrowers are late to repay their loans, or even default on them because they don’t keep track. This can happen if a borrower has multiple loans which makes it difficult to have a check on each one.

2. Changing your contact information and not notifying your loan servicer about it - If you are planning to change any contact information like address or phone number, then make sure to update your loan servicers about it in order to avoid delay in receiving loan statements and bills.

3. Late payment - Having delay even one payment will ruin your credit score, making you less qualified for a loan and if your loan application is already accepted, then you might be charged with higher interest rates. Your cosigner will also not qualify for release in this case.

4. Not signing up for Auto-debit - This payment system allows your lender to automatically deduct your monthly payments directly from your account. This will prevent any late payment and will also give you a 25% - 50% reduction on your interest rates. Remember that you have control and can sign out anytime you feel you won’t be able to afford it.

5. Not claiming the deduction on student loan interest - Borrowers having both Federal and Private loans can allow you to claim up to $2500 as deductions on interest on your Federal income tax return. This will help you save more on your taxes.

6. Going for a very long repayment plan - Choosing plans which have longer repayment periods will help you make lower monthly payments but increases the interest over time. So make sure to choose a plan with a shorter repayment period to save on interest payments and also clear off your debts faster.

7. Not understanding how interest accrues and loan amortization - Interest accrues on the remaining principal balance each month. In the beginning, the loan payment will be the interest charges and not the principal amount, so the debt will decrease at a slower rate.

The interest that accrues during deferment or forbearance will have to be paid off before the principal balance decreases. After paying for a number of years only it will show an effect and the decrease in the principal amount will become more evident. To fasten up the process, one can pay more per month.

8. Not taking into consideration the outcome of interest capitalization - As you are delaying payments, more interest will accrue on your loan amount and if it is not paid as it accrues then it’ll become expensive over time. This is because the amount will be capitalized, which means that it’ll be added to the loan balance.

9. Paying for the wrong loan - Some borrowers tend to pay off their loans of the lower amount first if they have extra funds. This will only help them psychologically as they would be motivated when seeing their loans being paid off. But they won’t be saving any money.

10. Pay fees for consolidation - There are a number of ways which allows a borrower to consolidate their loans for free. They can go to the student loan government website and get it done, or even change their repayment plan to reduce monthly payments.

11. Loans default - Defaulting on loans can get you in a lot of trouble. The government and the lenders will be taking legal actions against you like garnishing your wages. It’ll also ruin your credit score which will make it hard for you to apply for loans when needed.

12. Relying on bankruptcy for forgiveness - If you think filing for bankruptcy will help you get your loans discharged, then you are wrong. Most of the private and federal loans don’t qualify for discharge on bankruptcy. It rarely happens and that too after completing many obligations.

Frequently Asked Questions

  • 1.Which student loan should I pay off first - subsidized or unsubsidized?

    An unsubsidized loan means that the interest accrues from the time of disbursement. However, if the interest rate is very low, you won't have much capitalization by the time you're in repayment. For this reason, pay unsubsidized low-interest loans after subsidized high-interest loans.

  • 2.Should I pay off my student loan in one lump sum?

    Even if you want to pay off your student loans in a lump sum, make sure to fund your emergency fund first, no matter what. If you use all your cash to pay off a student loan, hoping to save on interest, you'll just wind up paying a higher rate when you use your credit card to finance an emergency.

  • 3.Is it better to pay off interest or principal on student loans?

    That's okay, you are not required to pay the accrued interest while in school or during your grace period, the interest will be capitalized (added to the principal balance of your loan) when you enter repayment.

  • 4.Should I pay off student loans with higher interest first?

    It usually makes the most sense to pay off the loan with the highest interest rate first. That means paying off your private student loans first and the federal student loans later. Of course, you will still need to make the minimum payment on your federal student loans.

  • 5.Can you negotiate a payoff on a student loan?

    If your private student loans are in collections, you have a few main options. You can pay the entire bill, negotiate a payment plan or try to settle the debt.