Which Student Loans Should I Pay Off First?

If you have multiple types of student loans, such as different kinds of federal loans along with private debt, trying to figure out how best to tackle all of it can feel overwhelming. In many cases, paying off private student loans before federal loans makes the most sense, due to the former often having less favorable terms. However, there’s no universal solution, as it depends on what your goals are, such as trying to minimize interest, reduce uncertainty, or build momentum toward becoming debt-free.

4 Things to Consider When Evaluating Repayment Priorities

What Types of Student Loans You Have

Student loans fall into one of two main categories: federal and private loans. Federal student loans have fixed interest rates set at the time the loan is taken out, whereas private student loans can be either fixed or variable.

Federal student loans often have better terms, particularly regarding repayment requirements, such as by offering pathways to loan forgiveness and forbearance options. There are a few private lenders that also offer some repayment flexibility, but in most cases they won’t be as generous as their federal counterparts. As such, it often makes sense to pay off private student loans first, as you want to reserve that flexibility with federal loans in case your circumstances change in the future.

Among federal student loans, there are also different types to consider, and their varying terms can affect your choices. Currently, the United States Department of Education offers the following four loan types:

• Direct unsubsidized: Interest accrues on these loans while you’re in school and during a six-month grace period before you have to start making payments. Because accrued interest increases your loan balance, tackling this debt is more of a priority for some borrowers, though factors like loan size still matter.
• Direct subsidized: The federal government covers the interest on these loans while you’re in school and for the six-month grace period afterward, which means you’d have a lower repayment amount compared to unsubsidized loans of the same size. As such, you might prefer to tackle these loans after unsubsidized loans, if that means the larger balance gets paid down first. That said, some might prefer to start with the lower balance to build momentum.
• Direct PLUS loans: PLUS loans are for parents of undergraduates, or graduate and professional students, who can take these loans out themselves. In both cases, interest accrues as soon as the loan is disbursed, although graduate and professional students don’t have to make payments while in school or for six months after, albeit with interest still accruing. It often makes sense to pay these off before other direct loans, especially because interest rates are generally higher.
• Direct consolidation loans: While you can’t exactly refinance your federal student loans, you can take out a consolidation loan that combines several of them into one. The interest rate for this type of loan is based on a weighted average of your prior loans’ rates. By consolidating your federal student loans, you can sidestep having to decide which one to prioritize. However, if it’s between this option and private loans, you might still prefer to tackle the latter first.

The Interest Rates and Rate Type

Your interest rate is also a big factor in deciding which student loan ought to be repaid as soon as possible. However, there are different ways to approach this aspect. One strategy is to prioritize the loan with the highest interest rate first, as that can mean paying less in interest in the long run. However, if your federal student loans happen to have higher rates than your private ones, you’ll have to weigh whether the interest savings are worth giving up the former’s benefits flexibility sooner.

Another factor to consider is whether the interest rate is fixed or variable. As previously mentioned, federal student loans are fixed, while private loans can be either. If you have both types, you might prefer tackling the variable loan first to limit the window in which rates can increase.

The Loan Terms

Although federal student loans often have more favorable terms, not all borrowers will be able to take advantage of them. For example, if you’re a high-income earner, you might be ineligible for certain benefits like income-driven repayment (IDR) plans. Think carefully about what options you’ll likely have before deciding what loans to prioritize.

The repayment term also matters. Some borrowers prefer to pay more in the long run if it means having a lower monthly payment, thereby providing more room in their monthly budget. If that applies to you, tackling the shortest-duration loan might be best.

Pay attention to your other types of debt and how these accounts might impact your ability to meet other financial goals. In some cases, it might make more sense to put money toward paying down other types of high-interest debt while making the minimum monthly payment on your student loans. Once your other debt is paid off, you can decide whether to start with federal or private student loans.

What Other Debt You Have

A final factor to bear in mind is if you have any other kinds of outstanding debt. Let’s say you have a lot of high-interest credit card debt. One option could be to take out a personal loan to pay off both your student loans and credit card debt, and then just focus on paying off the personal loan. However, this strategy shouldn’t be taken lightly. You need to calculate all costs involved and determine if this is realistically going to save you the most money.

3 Strategies for Prioritizing Your Student Loan Payments

There are different ways to approach paying off your student loans. One isn’t inherently better than the others, as the decision ultimately comes down to your financial situation and preferences.

Prioritize Private Student Loans

A general rule of thumb is to prioritize repaying your private student loans, even if the interest rates and loan terms are more or less the same as your federal loans. The repayment flexibility of federal student loans means you could have a monthly payment as low as $0 under certain IDR plans. Additionally, if you work for the government or a nonprofit, you could be eligible for Public Loan Service Forgiveness (PLSF) after making 120 monthly payments.

Prioritize Higher-Interest Loans

One common strategy is to simply pay off the highest-interest loans before moving on to the next highest-interest one, and so on and so forth, until all are eventually paid off. This approach is called the debt avalanche strategy, and if you can stick with it, you’ll pay the least amount of interest possible.

Prioritize Smaller Loans

In contrast to the debt avalanche method, some borrowers may prefer to pay off the smallest loans first to build momentum in what’s known as the debt snowball method. This might mean paying more interest in the long run, but the peace of mind that can come with watching the number of loans you have dwindle may be worth that cost.

The Bottom Line

While not everyone will agree on which kinds of student loans ought to be repaid first, the right decision for you will depend on your financial situation and what you feel most comfortable with. For many people, paying off private student loans before their federal counterparts will be the right call. However, before you decide to go down this route, it’s worth considering the amount of interest you’ll pay in the long term, how payments will affect your monthly budget, and whether you can qualify for federal loan forgiveness