Which Student Loan Should You Pay Off First?

Pay off high-interest student loans first. That usually means prioritizing private loans over federal loans.

Brianna McGurranJuly 24, 2020
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Pay off the student loan with the highest interest rate first. That will save you the most money over time.

But if getting rid of small balances one by one motivates you more, go that route regardless of interest rate. When your goal is to pay off student loans fast, the best strategy is the one that keeps you on track.

Focus on private student loans

Private loans are those that appear on your credit report but are not listed in the federal National Student Loan Data System. If you have a mix of private and federal student loans, focus on getting the private ones off your plate first. They generally have higher interest rates and fewer repayment options or opportunities for forgiveness than federal loans.

To free up money for private loan payoff, consider paying the minimum on federal loans for the time being, or putting them on an income-driven repayment plan. That will limit your federal loan bill to 10% or 15% of your discretionary income. You can always pay more than the minimum once your private loans are gone.

Option 1: Pay off high-interest loans first

Once you’ve decided which type of loan to attack first, choose a strategy. Getting rid of loans in order of the highest interest rate is called the debt avalanche, and it will save you the most money. Paying off a loan with a 4.53% interest rate, for instance, lets you pocket 4.53% of the balance each year you would have been in repayment.

Here’s an example: Paying off a $10,000 loan at 4.53% interest in five years, rather than the standard 10-year repayment timeline, will save you about $1,259 in interest. Paying off a $10,000 loan at 7% interest in five years instead of ten years, however, will save you $2,050 or $794 more.

Option 2: Pay off small loans first

Some borrowers like watching their loans disappear, which encourages them to continue focusing on debt payoff. If that sounds like you, use the debt snowball method. You’ll pay off the smallest student loan first, rather than the one with the highest interest rate.

You can also opt for a combination method. Rank your loans by interest rate, and if several have the same or similar rates, pay off the smallest one first. You’ll still get some savings from choosing the debt avalanche strategy, but you’ll enjoy early, quick wins, too.

As you pay off each loan, roll over your payment to the next highest interest rate or the next smallest balance.

Pay attention to the big picture

Not everyone should pay off student loans early. First, make sure you’ve:

  • Saved at least a month of expenses for emergencies.

  • Started saving automatically for retirement, either by getting the company match on a 401(k) or putting money in a Roth IRA.

  • Made a plan to pay off credit card balances, which often have the highest interest rates of all.

Then you're ready to focus on freeing yourself from student loan debt.

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