Paying off your student loans is a feat accomplished through persistence and patience. Deciding which student loan to pay off first is a commonly asked question, since many student loan borrowers have more than one loan. Typically, it is most prudent to pay off the loan with the highest interest rate first, which will help you save the most money over the life of the loan. Since private lenders could incorporate additional borrower credit risk into their financial models, this usually implies that you would want to start paying off your private loans before your federal loans since federal student loan rates could be lower. Additionally, federal student loans have various income repayment plan benefits you may want to continue using to your advantage.
Some borrowers, however, feel more comfortable paying off the smaller loan balances first. Seeing Loan ABC's balance dropping in value over time and more sharply than Loan XYZ's balance could motivate some to stay on track and continue taking out sizable chunks in the balance of smaller loans.
Start chipping away at your private loans first
Many student loan borrowers inevitably end up in a position where they have a mix of federal student loans and private loans. The private loans may have higher interest rates since they take into account more credit risk in the borrower's profile. On top of this, many federal student loans also have repayment and forgiveness benefits, which provide some sort of cushion for a worst-case scenario, so it would most likely make more sense to keep the federal student loans around for a while.
First approach: Debt Avalanche Method
Make a list of all your private student loans and rank them by order of decreasing interest rate. Paying off the loan with the highest interest rate will help save you the most amount of money over time. For example, if you have a student loan with a balance of $25,000 and a maturity of 12 years and an interest rate of 5%, your total interest over the life of the loan will be $8,264, compared to $14,024 for a loan with the same balance and maturity but a higher interest rate of 8%. The loan with the higher interest rate in this scenario (all else equal) costs you $5,760 more in interest.
Second approach: Debt Snowball Method
If you, like many other student loan borrowers, feel more motivated and in control of your finances when you see your smaller loans completely moving out of the picture, it could make more sense to pay off the private student loans with the smaller balance instead of the private loans with the higher interest rate as seen in the Debt Avalanche Method.
What next?
Paying off your student loans early almost always places you in a tough spot compared to refinancing your student loans since you are reducing your principal balance directly by making hard cash payments. While refinancing can easen your financial burden, it does require a bit more due diligence than simply deciding to save more each month to contribute towards your various student loan balances.
Keep track of your student loans via the free PeppyWallet student loan dashboard without having to sign up or make an account. The student loan dashboard can help you quantify how much your total monthly payment is, determine your overall weighted average interest rate on your loans as well as spot unique refinancing opportunities.
