Which Student Loans Should You Pay Off First?

For many college graduates, student loans are a fact of life. With rising tuition costs and fees, getting a degree often requires taking on at least some debt. After graduation, student loans can become quite a burden (among other forms of debt), requiring high monthly payments for ten, twenty, or even thirty years. It can be a daunting task to figure out how you will pay off these loans, particularly if you have multiple lenders or significant debt.

Student loans can prevent you from making major decisions like buying a home, switching jobs, or even getting married. Having a high level of student loan debt can also negatively impact your ability to save for retirement. That is why it is critical to come up with a plan for repaying your student loans.

Types of Student Loans

To begin to a repayment plan, you must first know what loans you have, and what their terms and rates are. There are two primary types of student loans: federal and private. Understanding the difference between these two types of loans is critical to formulating a strong plan for repaying them.

Federal student loans can either be subsidized or unsubsidized, and tend to have lower interest rates and better options for repayment, including forgiveness programs and income-based repayment. Subsidized loans are approved based on financial need. For this type of loan, the federal government pays interest on the loan while you are enrolled at least half-time at an accredited institution as well as during grace periods and deferrals. In contrast, unsubsidized loans are not based on financial need, and the government does not pay the interest on these loans at any time. Both subsidized and unsubsidized federal student loans have far more protections for borrowers.

In contrast, private student loans are issued by private lenders. The interest rates can be quite high, particularly if the borrower does not have a high credit score. Many private lenders require a credit check to qualify for a private student loan, and many borrowers under the age of 25 will need a creditworthy co-signer to obtain these loans. The borrower will still have primary responsibility for repaying the loan, but if the loan goes into default, then the co-signer will be obligated to repay it.

Now that you understand the basic differences between federal and private student loans, make a list of the loans that you have. Group them by category — federal or private — and write down the interest rates and terms for each loan. Using this information, you can make a repayment plan that takes the advantages and disadvantages of each type of loan into consideration.

Pay Off Private Loans First

In many cases, private student loans will have higher interest rates than federal loans. However, even if your federal student loans have slightly higher or equal interest rates than your private loans, you should still pay off your private student loans first.

The reason is simple: you have far more protections with federal student loans than with private loans. This includes repayment options that are based on your income, or the ability to defer loans in the event that you are unemployed or face a crisis. Private loans tend to be inflexible, with a set minimum payment due regardless of your individual situation. They also do not offer loan forgiveness, unlike some federal student loans. That is why it makes the most sense to prioritize paying off private student loans first.

However, just because you are focused on paying off private loans does not mean that you should overlook your federal student loans. They are still debt, and you have to stay current on them to avoid serious financial repercussions. While you are paying off private loans, you could choose to pay the minimum amount towards your federal loans. Then once you have paid off your private loans, you can work on your federal loans. Maintaining your bank account might get confusing, but there is plenty of help to make it simple and easy!

When it comes to paying off student loans, remember that the longer you have the debt, the more it will cost you. That is why it makes sense to pay off your loans as quickly as possible by choosing shorter repayment terms and/or paying above the minimum amount due each month. By setting a game plan and dedicating yourself to becoming debt-free, you can achieve your goals and build your financial future free of the burden of student loan debt.


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