Which Student Loan Should I Pay Off First?

Posted by in Loans | Updated on October 5, 2022
At a Glance: The debt avalanche strategy targets the highest-interest loan first, and the debt snowball strategy targets the smallest loan first. The avalanche minimizes the amount of interest you have to pay, and the snowball strategy can be a useful motivational tool.

Student loans can be the most significant financial burden for many young people. The current cost of higher education means many people have more than one student loan. Combined with other debt, it can be difficult to figure out the best way to deal with it all. If you are unsure of which student loan to pay off first, read on for some guidance.

Private, High-Interest, or Small Student Loans?

If you have a combination of loans, the total amount you repay changes depending on how you structure your repayments. That is, by selectively paying more than the minimum on some loans, you can decrease the total amount of interest you get charged. This selection process is called having a repayment strategy for which student loan to pay off first.

When to Pay Off Private Student Loans First?

Private student loans tend to have higher interest rates than federal student loans. They are also less likely to benefit from loan forgiveness and have more restrictive repayment plans than federal student loans. 

These factors together mean it generally makes sense to pay off private student loans as fast as possible. There are a few strategies you can use to help you achieve this:

  • Refinance: Refinancing at a lower interest rate can save you money. This is an attractive option if you have a better credit score than when you first took out the student loan.
  • Minimum payment on other loans: If you’re in a financial position to make more than the minimum payment on your debt, focusing the extra payment on your private student loans is a good strategy. However, you must never pay less than the minimum on any loan. Doing so is treated the same as a missed payment, and eventually has the same negative impact on your credit score.

When to Pay Off High-Interest Student Loans First?

Once you have decided which type of loan to focus on first, you need to decide which one of that type to focus on first. 

In this situation, the debt avalanche strategy is considered the most cost-effective. This involves paying off the loans in the order of interest rate. That is, you make extra payments on the loan with the highest interest rate, and minimum payments on the rest until it is paid off, then switch to the next loan.

When to Pay Off Small Student Loans First?

An alternative to the debt avalanche is the debt snowball method. The debt snowball is a motivation-based method.  

The debt snowball method involves paying off the loan with the smallest balance first. This method can motivate people by decreasing the total number of loans they have. 

It is also possible to combine the two methods to enjoy some of the benefits of each.

Questions to Ask When Choosing Which Student Loans to Pay Off First

The process of creating a repayment strategy is not always easy. Below are a few questions you can use to guide yourself on which student loan to pay off first.

What Type of Loans Do You Have?

The decision on which student loan to put extra payments towards depends on what type it is: federal or private. Federal student loans generally come with a lot more benefits than private student loans, such as: 

  • Forbearance
  • Payment holidays
  • Subsidies
  • Deferment
  • Forgiveness.

If you are unsure what type of federal student loans you have (and what benefits you can get), check your FAFSA account for more detail. For private student loans, contact your lender or refer to your loan agreement.

What Are Your Interest Rates?

For the debt avalanche method, pay extra on the loan with the highest interest rate first. If your credit score (or income) has increased significantly since you took out the loans, you could also refinance some or all of your loans at a lower interest rate.

Another consideration is that if any of your loans have a variable interest rate, their ranking in the avalanche repayment strategy may change over time, so you should keep track of that.

How Much Do You Owe?

If you favor the debt snowball method, then the most important factor is the size of the remaining balance on each loan. Dedicating extra payments to the smallest balance makes it the fastest way to reduce the number of different loans you have. This can be a useful motivational method.

Paying Off Student Loans FAQ

The questions below often come up when discussing which student loan to pay off first.

Should you pay off a credit card or student loan first?

Credit card. Student loans in general have lower interest rates than other types of loans. For example, federal student loans usually have interest rates between 5% and 8%. On the other hand, many credit cards charge interest rates of 17%, and some significantly more. From the debt avalanche perspective, it makes sense to dedicate extra payments towards credit card debt first while making minimum payments on your student loan debt. However, remember never to pay less than the minimum on any loan, or it will be treated by the lender the same as a missed payment.

Should you pay off your student loan early?

It is illegal for student loan lenders to charge early payment penalties. These are fees charged by many other types of lenders for paying off a loan early. Student loan lenders cannot legally charge this fee, so there are not many disadvantages to paying off your private student loans early if you can afford more than the minimum payments.

For federal student loans, the situation is not as clear-cut. Although there are no early payment fees with federal student loans either, the current political climate means it could make sense to wait. During the COVID-19 pandemic lockdowns, payments on most federal student loans were waived, from March 2020 to August 2022. In addition, the current presidential administration has hinted at the possibility of a widespread student loan forgiveness scheme.

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Final Thoughts

The decision of which student loan to pay off first depends on which repayment strategy you are following. The debt avalanche strategy targets the loan with the highest interest first, and the debt snowball strategy targets the smallest loan first. The avalanche minimizes the amount of interest you have to pay, and the snowball strategy can be a useful motivational tool. Whichever strategy you choose, never pay less than the minimum repayment on your other loans.