Which Student Loans Should You Pay Off First? -Forbes | Vette Leader

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According to the latest data from the College Board, 55% of undergraduate graduates from a four-year institution graduated with $28,400 in student debt. In reality, however, that five-digit average is often a combined balance of smaller student loans over several years of college.

This mix of student loans usually has different interest rates, terms, and repayment options. To avoid extending your student debt repayments or potentially paying more interest than you owe, find out which student loans need to be paid off first.

Consider your credits before deciding your strategy

Before deciding on the most effective payout strategy for your student loans, you need to know the characteristics of each loan you owe.

loan type

Your student debt consists of either federal and personal loans, or a mix of both.

Personal loans have different terms and repayment details depending on the lender. Student loans provided by the federal government are more standardized, but the exact terms depend on the type of federal loan you have.

You may have one or more of the following government student loans:

  • Directly subsidized loans: During the school term, during the grace period, and in the event of a deferral or deferral, the interest accruing on subsidized loans is paid by the state.
  • Direct unsubsidized loans: Unlike subsidized loans, non-subsidized loans require you to pay back any interest accrued. This includes fees incurred during school, your grace period, deferment and forbearance.
  • Direct PLUS loans: PLUS loans are available for graduate students or parents of undergraduate students. As with direct unsubsidized loans, PLUS loans accrue interest once the funds are disbursed and borrowers are responsible for all interest costs.
  • Direct Consolidation Loans: If you’ve decided to consolidate your existing federal student loans, a direct consolidation loan simplifies your repayment experience. Interest accrued on the loan is also not subsidized, so you are responsible for paying all interest charges.

interest rate

Federal direct loans all have fixed interest rates. No matter what the interest rate on the loan was when you borrowed the money, that interest rate will remain the same throughout the life of the loan.

Private student loans, on the other hand, are offered as fixed or variable interest loans. Some lenders offer one option while others offer both.

A fixed interest rate offers the certainty of getting the same payment month after month. Floating interest rates may fluctuate over time depending on market conditions. While variable rates can be beneficial when interest rates are low, there is always a risk that interest rates will rise during the repayment period.

When deciding which student loan to pay off first, in addition to the interest rate itself, consider whether your loans have fixed or variable interest rates. A higher interest rate means you will spend more money over time — depending on your financial goals, for example, you might prioritize paying off high-interest loans first.

repayment options

In addition to the loan type and interest rate, a third consideration when choosing which student loans to pay off first is your repayment schedule.

A longer repayment period can reduce your monthly payments, but you pay more interest because it takes longer to repay. A shorter term means you’ll pay off your student loan faster, but your monthly payments will be higher.

Also, find out about the different repayment plans available for each loan you have borrowed. For example, federal student loans offer income-based repayment plans that can reduce your monthly payment to $0 per month if your income meets the eligibility requirements. Personal loans typically don’t offer income-based repayment options, but your lender can advise you of your options if you’re having trouble paying your loan.

3 strategies to pay off your student loans

Once you’ve gathered all of the details for each of your student loans, it’s time to choose a payout strategy based on your financial goals. Below are three strategies that focus on different goals.

1. Pay off personal loans first

best for: Borrowers with adjustable rate personal loans

Private credit tends to be more risky than government debt. They don’t offer the lavish features that federal loans offer, such as: B. Means-based repayment, forgiveness plans and more flexible forbearance options. Personal loans can also come with fluctuating variable interest rates that have increased since you first borrowed.

To pay off your personal loan debt first, consider a personal student loan refinance if you can qualify for a lower interest rate. A student loan refinance may offer an opportunity to lock in a fixed, low interest rate that will save you money over time. As you make payments on the refinanced personal loan, continue to make minimum payments on your federal loans to keep them in good standing.

2. Pay off the highest interest rate first

best for: Borrowers who want to save the most money on interest charges

Paying off your high-interest debt first (also known as the debt avalanche method) can save you a lot of money on interest costs — although it may take a while before you see any progress. First, make a list of all your student loans and identify the loan with the highest interest rate, whether it’s federal or private. Allocate any additional funds you have available to an additional monthly payment on this loan while making the minimum payments on your other debts.

Continue with this payment approach until you have paid off the top-rate loan in full. Then do the same for the next higher interest rate on your student loan list, and so on. This strategy will help you to spend less on your studies overall.

3. Pay off the smallest balance first

best for: Borrowers motivated by rapid progress

By paying off your loan with the smallest balance first (commonly known as the debt snowball method), you can make small profits quickly. This can encourage you to continue pursuing your goal of being debt free.

After you’ve made the minimum monthly payment on all of your student loans, identify the student loan with the lowest balance. Put extra money to make an extra monthly payment on that loan.

When you’ve paid off the student loan with the smallest balance in full, redirect your extra money to your next smaller loan. You’ll pay off your small, individual loans faster and stay inspired to work your way through all of your outstanding student debt.

bottom line

Deciding which student loans to pay off first is different for each borrower. Getting your student debt to zero depends on many factors, including your loan type, its terms and characteristics, and your overall financial goals.

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