Which student loans should you pay off first?


Do the math to decide how to pay off student loans. (iStock)

After the college graduation celebrations are over, the reality of student loan repayment kicks in. Deciding how to repay student loans begins with budgeting, but it’s more than that. When creating a repayment plan, it helps to approach student debt repayment in the correct order.

Start by organizing your loans

The first step in deciding how to repay student loans is to dig into the details. Concretely, you must know:

  • The total number of loans you have outstanding
  • Whether the loans are federal, private, or a mix of each
  • Which loans are co-signed, if any
  • Whether your federal loans are subsidized or unsubsidized
  • Minimum payments for each loan
  • Interest rates on loans and whether they are variable or fixed
  • At the end of the grace period for each loan, if applicable

WHAT IS AN INCOME-BASED STUDENT LOAN REPAYMENT PLAN?

Federal student loans provide a six-month grace period after completing undergraduate studies before payments begin. PLUS loans are the exception – repayment for these begins immediately after disbursement.

The grace period gives you the flexibility to choose a repayment plan and develop a strategy. Private student loan lenders may offer a grace period, but it is not required.

Choose a refund method

When deciding how to repay student loans, there are two basic approaches you can try: snowballing or debt flooding.

The snowball method is to pay off loans from lowest to highest balance. The avalanche method involves repaying loans from the highest interest rate to the lowest.

Mathematically, you’ll save more money over time by choosing the avalanche method, said Meagan Landress, CSLP®, advisor for student loan consultancy Student Loan Planner. According to Landress, the snowball approach is more behavioral because you get small wins along the way, which can help keep you motivated.

HOW TO ESTIMATE YOUR STUDENT LOAN PAYMENTS

Define the repayment order of the student loan

When there are multiple student loans in the mix, prioritization is important. When developing a repayment plan, remember to follow this order:

First: private variable rate student loans

Private student loans tend to have higher interest rates than federal loans. Variable rate loans have an interest rate tied to a benchmark, which means the rate could rise if the benchmark rate rises, so it might be wise to eliminate them as soon as possible.

Second: fixed rate private student loans

After private variable rate loans, then think about your private fixed rate loans. While the rate is guaranteed for the life of the loan, it can still be higher than federal loan rates, which can cost you more in interest.

Federal unsubsidized loans, then subsidized loans.

Unsubsidized federal student loans start accruing interest immediately, so it makes sense to work on paying them off after reducing private loan balances. “Subsidized loans do not charge interest during deferment, adjournment or abstention from school,” Landress said.

With unsubsidized and subsidized loans, you could take the same snowball or avalanche approach. For example, you can pay off unsubsidized loans at the highest rate first, then subsidized loans at the highest rate, followed by unsubsidized and subsidized loans with the lowest rates.

STOP ENTERING STUDENT LOAN SALARY WITH THESE 3 TIPS

Avoid false reimbursement steps

Consolidating or refinancing loans could help streamline student loan repayment by combining multiple loans into one. But you should consider all the tradeoffs involved. This includes the sacrifice of deferral and forbearance periods, income-tested repayment options and the cancellation of civil service loans.

Finally, watch out for these other mistakes in managing student loan repayments:

  • Avoid your lenders when you are having trouble meeting your payments.
  • Overlooking income-based repayment options for federal loans.
  • You don’t get interest rate discounts because you didn’t sign up for automatic payment.
  • Plagued by student loan debt relief scams.
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