Which Student Loan Should You Pay Off First?

If you’re like the average college student, you may face balancing new financial priorities with hefty student loan payments upon graduating. The average college graduate finishes school with over $30,000 of student debt. Prioritizing which student loan to tackle might help you find a more manageable way to handle your debt.

4 Student loan payoff strategies

1. Paying off private student loans first

Private student loans usually have higher interest rates and shorter repayment timelines than federal loans, and they don’t offer income-driven repayment options or forgiveness programs. For these reasons, paying off private student loans first is a good idea.

2. Paying off highest-interest student loans first

When managing debt, paying off the highest interest-rate debt is commonly recommended. This is called the debt avalanche method. This approach does not consider loan balances but focuses on reducing the overall amount you owe by eliminating the loans with the most interest first.

Once you have paid off your highest interest-rate loan, you would move on to the next one. In the meantime, you’ll make minimum payments on all other loans. Because this method does not consider loan balances, it could slow you down from becoming debt-free, but it usually reduces your costs overall.

3. Paying off smallest loans first

If you decide to pay off your smallest loans first without considering interest rates, you’ll use the debt snowball strategy. While you focus on paying off the smallest loan, you’ll make minimum payments on all other loans. This approach brings quicker results but is often costlier in the long term.

4. Paying off a single refinanced student loan

Refinancing your student loans into one loan can be a good repayment strategy if you have private loans and qualify for a lower interest rate. This organizes all your loans into one loan with one balance and one interest rate. If you have federal loans and want to avoid losing the benefits that come with them, consider student loan consolidation instead.

Deciding which payoff strategy to use: 3 factors to consider

If you have multiple loans, especially a mix of federal and private loans, you’ll need to create a repayment strategy. Here’s how to decide which student loan to pay off first.

1. Types of loans

Federal student loans

If you have federal student loans, they may be either subsidized or unsubsidized loans. It’s typically best to focus on your unsubsidized loans first since they accrue interest during school and your grace period.

Private student loans

Private loans are what you borrow from banks, like Citizens Bank, or online lenders, like SoFi. Private loans typically have higher interest rates and shorter repayment terms and do not offer loan forgiveness or income-driven repayment options. For these reasons, it’s often best to focus on paying off these student loans first.

2. Interest rates

If you have several different loans with varying interest rates, the debt avalanche method is usually the fastest way to pay them off. You’ll also pay as little interest as possible. You can also use this method with refinancing — potentially bumping down the interest rates on your private loans by consolidating them with a private lender.

3. Amount of debt

Another way to approach your repayment strategy is to evaluate how much you owe on each of your loans and use the debt snowball method to prioritize payoff. Because the snowball method focuses only on the total balance, you may pay more in total interest than if you used the avalanche method. If you don’t want to pay more interest than you have to, use the snowball method only when your interest rates are within a percentage point.

Paying off student loans early

You can choose to pay off your student loans early at any time — it is illegal for student loan lenders to charge a prepayment fee. If you have private student loans, there is little downside to paying off your student loan early. Doing so will save you money in interest and free up your budget for other financial goals.

In terms of federal student loans, since they don’t require immediate repayment, you may want to use this time to focus on paying toward your private student loans first. Federal student loan borrowers should also evaluate the repayment plans available and consider whether they can allocate any available funds in their budget toward paying off higher-interest debt.

Student loan debt vs. other debt: Which one to pay off first?

Student loan interest rates are usually relatively low compared to interest rates on other types of debt, which means they may fall lower on your priority list for debt repayment. Evaluating your interest rates can help you rank the order in which you might consider prioritizing which debts to pay down using the debt avalanche method.

For example, if you have an auto loan at 6 percent interest, a credit card with a 21 percent interest rate and a student loan at 8 percent, it may make the most sense to pay down your highest-interest debts before making any extra payments toward student loans, which are accruing the least interest.

Bottom line

Which student loan you pay off first is up to you, but the best choice is usually the one with the highest rate or the fewest consumer protections. The best strategy for you can also vary based on the type of student loans you have and how much student loan debt you have in total.

No matter what you decide, it’s best to be strategic with your student loans. A student loan debt repayment plan that takes loan rates, terms, and benefits into account could help you get out of debt faster while maintaining as much consumer protection as you possibly can.