If you have multiple loans with varied interest rates, the debt avalanche strategy is typically the quickest way to pay them off. You’ll pay as little interest as feasible.
The average college graduate leaves school with more than $37,000 in Student debt. Finishing school, finding a job, and handling new financial goals can be difficult when combined–especially if a student loan payment requires several hundred dollars per month.
Having a debt management strategy can help new grads manage their finances and reduce stress.
1. Federal student loans
If you took out a federal student loan on or after July 1, 2010, you most likely have a Direct Loan.
Federal Student Loans taken out before July 2010 might be either a Federal Family Education Loan (FFEL) or a Perkins loan. The government no longer issues these loans and has replaced them with the Direct Loan program, although you may still be paying on them, depending on when you borrowed.
In general, federal loans provide better borrower protections and cheaper interest rates than private student loans (regardless of what your federal loan is called). Because of these benefits, you should prioritize paying off your private loans first.
For example, suppose you’re a public school teacher with federal and private student loans. You are also eligible for the Public Service Loan Forgiveness (PSLF) program, which would cancel your federal student loan balance after ten years of qualified payments.
If the following scenario is accurate, it is reasonable to continue paying the minimum payments on your PSLF-eligible federal loans while working toward student debt forgiveness. Instead, you could wish to quickly pay down your private student loans, which will not be forgiven (and are likely to have a higher interest rate).
2. Private student loans
Numerous companies offer private student loans. Your loan servicer can provide information on federal loans, but not on non-federal debt.
Instead, you can locate your private student loans by reviewing your credit history. AnnualCreditReport.com allows you to get a free credit report from the three major credit reporting agencies: Experian, TransUnion, and Equifax.
Unlike federal student loans, which are standardized by the government, private student loans create the majority of their standards. Private loans are vital for those who cannot afford college otherwise, but they typically offer fewer perks such as postponement, forbearance, and forgiveness. Therefore, it is better to knock off these loans first.
3. Pay off capitalized interest
Unless your loans are federally subsidized, interest will accrue while you are in school, during the grace period, and during times of postponement and forbearance. When repayment begins, the interest capitalizes, so your debt grows and you pay interest on a higher amount.
To avoid capitalization, consider making monthly interest payments as they accrue. Alternatively, make a lump-sum interest payment before your grace period or postponement expires. That won’t directly speed up the payment process, but it will result in a lesser balance to clear.
4. Get Organized
Knowing where you are right now is a critical first step in figuring out how to pay off various student debts.
Begin by jotting down each of your student loans, sorting them by federal and private. Data should contain the loan servicer or holder, statement amounts, interest rates, and monthly payments.
5. Consider Affordability
Your financial circumstances may have altered in the past year or since you began repayment. To estimate a monthly loan payment amount that is manageable for you, create a clear picture of your monthly income and expenses, including any other debt you may have, such as credit cards.
Having a clear understanding of your current circumstances will allow you to focus on your long-term repayment objectives.
6. Know Your Options
Most student loans, including some private ones, offer forbearance options. This advantage enables borrowers to postpone payments due to hardship while interest and penalty costs continue to accrue.
According to experts, forbearance may be a useful way to avoid late payments and conserve cash flow if you’re struggling financially or recuperating from a big economic loss. However, because it may increase the sum of a loan over time, you should think carefully about this temporary remedy and how it may affect your long-term financial condition.
7. Explore Payment Methods
Most consumer debt, including multiple school loans, can be managed using either the debt avalanche or debt snowball strategies. They can help you pay off your college debt faster.
The avalanche method is based on the idea of initially repaying your debt with the highest interest rate. At the same time, you are making the minimum payments on the other debts.
The snowball technique requires you to first pay off the debt with the smallest sum and then pay the minimum on the other loans. Paying off the smallest loan first, going from smallest to largest creates momentum by diverting payments from the paid-off loan to the next loan with the lowest balance, and so on until all loans are paid off.
8. Make More Than the Minimum Payment
If your budget allows, consider increasing your monthly student loan payments. When you reduce the principal balances on your student loans, you shorten the loan period and lower the amount of interest accrued over time.
Setting up regular automatic payments allows you to “set it and forget it” and will help you achieve your goal of paying off your student loan debt faster if you pay more than the minimum. Even a tiny sum can help. Begin where you can and progressively increase your additional contributions over time.
9. Make additional payments toward the principle
There are no penalties for repaying student loans early or paying more than the minimum. However, there is one exception to prepayment: student loan servicers, who collect your bill, may utilize your extra payment to advance your due date by applying it to the following month’s payment.
Changing the due date of your student loans will not help you pay them off faster. This is because your additional payment will be applied first to any late fees, followed by accrued interest, before reaching your principal balance. Instead, instruct your servicer — either online, by phone, or by mail — to apply overpayments to your principal balance and keep the next month’s due date as scheduled.
You can make numerous payments throughout the month or make a single student loan payment on the due date. Both strategies can help you save a lot of money.
For example, suppose you owe $10,000 at a 4.5% interest rate. Paying an extra $100 per month on a conventional 10-year repayment plan would get you debt-free around five and a half years ahead of schedule.
10. Enroll in auto payment
Signing up for autopay is another strategy to minimize your student loan’s interest rate and direct more of your money toward your principal balance.
If you allow federal student loan servicers to automatically take payments from your bank account, you can save a quarter-point on your interest rate. Many private lenders also provide auto-pay deductions.
The savings from this discount are likely to be minor — reducing the interest rate on a $10,000 loan from 4.5% to 4.25% would save you approximately $144 throughout a 10-year repayment plan. However, when combined with some of the other tactics mentioned above, it can help you pay off your student loans quickly.
11. Make biweekly payments
A bi-weekly payment means paying half of your student loan amount every two weeks rather than making a single full monthly payment.
You will wind up making an extra payment each year, reducing your repayment schedule and interest rates. Use a biweekly student loan payment calculator to figure out how much time and money you can save.
12. Stick to the usual repayment plan
Unless you specify otherwise, the government automatically sets a 10-year repayment period for federal student loans. If you are unable to make extra payments, the quickest approach to pay off federal loans is to stick with the usual repayment schedule.
Federal loans provide income-driven repayment programs, which can reduce your monthly payment while simultaneously extending the due period to 20 or 25 years. You can also consolidate student loans, extending repayment to a maximum of 30 years, depending on your debt.
13. Use ‘found’ money
If you receive a raise, a student loan refinance bonus, or another financial windfall, attempt to put at least some of it toward your loans.
You can also check with your employer. Some employers pay off student loans as an employee benefit. Find out if your workplace has an employer student debt repayment program and how to enroll.
Start a side hustle to boost your income and pay off your student loans faster. Sell clothing, unused gift cards, or photos; rent out a spare room, parking spot, or car; or use your abilities to freelance or consult on the side.
If you need help finding extra money to pay down your student debts, consider money-saving applications like Digit and Qapital, which allow you to save consistently with little work on your part.
14. Your interest rates and loan balances
Getting a sense of who you owe and how much you owe is one of the first stages toward deciding on a repayment approach that suits you. You could do this by creating a student loan spreadsheet. Include the name, balance, interest rate, and minimum monthly payment for each loan on the document.
If you have private loans, you’ll also need to determine whether the interest is fixed or variable. (Federal loans issued after 2006 all have fixed rates). Variable interest rates can be problematic during periods of economic uncertainty or high inflation, so pay them off before your fixed-rate loans.
Student loan payoff strategies
Having many student loans might feel like a balancing act, but developing a clear repayment strategy can help relieve some of the stress. Here are four approaches to consider:
- Pay off your private student loans first
- Pay off your highest-interest student loans first
- Pay off your smallest student loans first
- Pay off a single refinanced student loan
1. Pay off your private student loans first
As previously stated, private student debts should most likely take precedence over federal loans. You’re likely to pay higher interest on private debt, and if you run into financial difficulties, your private loans may provide fewer possibilities than your government loans.
2. Pay off your highest-interest student loans first
The debt avalanche approach is a popular debt repayment plan in which you focus on the loan with the highest interest rate first, regardless of its balance. This could result in significant savings because you will pay less interest over time.
While effective, the debt avalanche strategy may not be suitable for everyone. If your highest-interest loan also has the greatest balance, you may lose motivation because you will be paying off the same debt for years.
3. Pay off your smallest student loans first
In contrast to the debt avalanche, the debt snowball strategy ignores interest rates and instead prioritizes loans with the lowest sums. Once you have paid down your smallest student debt, you will go on to the next smallest, and so on.
The concept behind the debt snowball is momentum. The “quick wins” associated with totally paying off your lesser debts can push you to stay on pace with payments.
4. Pay off a single refinanced student loan
If you have more than one private student loan, you might consider refinancing.
Student loan refinancing allows you to consolidate multiple debts into one. This could be a smart choice if you’re trying to keep up with several student loan bills or if your credit has improved since you took out your loans (you might now qualify for a reduced interest rate).
Although it is feasible to refinance federal student loans into private loans, we do not typically advocate it. Because moving to a private refinancing loan would result in the loss of federal protections, you should only consider this option if you are nearing the end of your repayment period and can save money on interest.
Instead of refinancing, federal debtors may wish to consider student loan consolidation. Consolidation is comparable to refinancing; you combine multiple federal loans into a single federal consolidation loan. But because your loan will stay federal, you will be able to preserve your federal borrower benefits.
How to Choose Which Student Loan to Pay Off First
If you have numerous loans, particularly a combination of federal and private loans, you will need to develop a repayment plan. Here’s how to determine which student loan to repay first.
What types of loans do you have?
There are two primary types: federal and private. Federal loans are provided by the federal government and may have been made available to you after completing the Free Application for Federal Student Aid. Banks like Citizens Bank or Discover, as well as internet lenders like SoFi or College Ave, offer private loans.
Federal student loans offer additional perks than private student loans, including deferment and forbearance, income-based repayment alternatives, and loan forgiveness programs. Because of this, it may be prudent to pay off your private student loans first.
If you have federal student loans, they can be subsidized or unsubsidized. It’s always better to prioritize your unsubsidized loans first because they incur interest during school and your grace period.
Not sure what type of loans you have? Pull up your account and look at the loan names. If you see the phrases “federal,” “subsidized,” “unsubsidized,” or “Direct,” you probably have federal loans. You can also contact your loan servicer’s customer service department to confirm. Some loan businesses service both federal and private loans, so don’t presume your loan type is based on the servicer.
What is your interest rate?
If you want to focus on the lowest approach to repay your debt, look into your interest rates if you plan to employ the debt avalanche strategy.
The debt avalanche strategy prioritizes paying off debts with the highest interest rates first. For example, if you have one loan with 10% interest and one with 7% interest, you would pay more on the 10% loan while making minimum payments on the 7% loan.
If you have multiple loans with varied interest rates, the debt avalanche strategy is typically the quickest way to pay them off. In addition, you will pay the least amount of interest imaginable. You can also use this strategy for refinancing, which may lower the interest rates on your private loans by merging them with a private lender.
How much debt do you have?
Another approach to your repayment strategy is to determine how much you owe on each loan and utilize the debt snowball method to prioritize payoff.
The debt snowball strategy entails paying off the debt with the lowest balance first, then making minimum payments on the remainder. Once the loan is paid off, you move on to the next smallest balance. This produces a snowball effect, hence the name.
While the debt avalanche approach often speeds up loan repayment, the debt snowball method works better for some people due to its incentive structure — you should pay off the initial and smallest debt as soon as possible, which will propel you on to the next loan.
Because the snowball approach only considers the total sum, you may pay more overall interest than if you employed the avalanche method. If you don’t want to pay more interest than necessary, apply the snowball method only when your interest rates are within a percentage point of each other.
How do you select whether to pay off a college loan or other debt first?
Student loan interest rates are typically lower than interest rates on other types of debt, therefore they may rank lower on your priority list for debt repayment.
For example, federal student loans for the 2023-24 academic year will have set interest rates ranging from 5.50 percent to 8.05 percent. Many students who borrowed in earlier years had substantially lower rates than that. Meanwhile, the average credit card interest rate is now over 20%.
Evaluating your interest rates might assist you rank the order in which you should prioritize which loans to pay down using the avalanche method described above.
For example, if you have an auto loan with a 6% interest rate, a credit card with a 21% interest rate, and an 8 percent student loan, it may be best to pay off your highest-interest bills first before making any further payments toward student loans, which have the lowest interest rate.
What is the fastest way to pay off student loans?
The quickest approach to pay off student loans may be to pay interest while in school, use autopay, and make biweekly payments. If you can make additional payments toward the principal, this will accelerate your debt-free date even further. You should also consider refinancing to potentially cut your interest rate and shorten your payment period.
Are there loans to pay off student loans?
Yes, you can use a loan to repay student loans. Student loan refinancing, which involves exchanging numerous student loans for one private student loan with better terms, is likely to save you more money than taking a personal loan to pay off student debt.
When do you pay back a student loan?
Repayment for federal and private student loans normally begins six months after graduation or leaving school. However, you are not required to wait before beginning payments.
Should you repay your student loan early?
You can pay off your student loans early at any time; it is prohibited for organizations to levy a prepayment fee. If you have private student loans, there is little reason not to pay them off early if possible. This will save you money on interest and free up your budget to pursue other financial goals.
If you have federal student loans, you may not have paid a regular payment in a long time (or ever, depending on your graduation date). If you are struggling to manage your expenses, the federal government has proposed a 12-month “on-ramp” to repayment, which would reduce penalties for borrowers who are declared delinquent for a limited time–until the end of September 2024.
If you are falling behind on other debt payments, you can take advantage of this opportunity to catch up while outstanding student loan payments are not reported to credit bureaus, marked late, or placed in default.
Borrowers of federal student loans should also analyze their repayment options, including whether they can dedicate any available monies in their budget to pay off higher-interest debt.
In Conclusion
You can choose which student loan to pay off first, but the best option is usually the one with the highest interest rate or the fewest consumer safeguards. The ideal method for you may differ depending on the student loan type and the overall amount of debt you owe.
Whatever you choose, you should approach your student debts strategically. A student loan repayment plan that considers loan rates, conditions, and benefits may help you pay off your debt faster while keeping as many consumer safeguards as possible.
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