For many people, it is better to pay off a single student loan. But for those who have more than one loan, choosing which one to pay back first could be tricky. It depends on their situation and what they want.
How to know which student loan to pay off first
You need to make a plan for how you will repay your loans. The first step is to decide which one you want to pay off first.
What are the different loans that you have?
Federal and private loans are different. Federal loans come from the government, and you might have taken them when you filled out the Free Application for Federal Student Aid (FAFSA). Private loans might be from a bank like Citizens Bank or Discover or online lenders like Common Bond or College Ave. You’ll need to know which kind of loan you have before deciding what to do with it.
Federal loans for students have more benefits than private loans. You can get a break from paying or make your payments low if you need to. Private loans don’t have these options. It might be smart to pay off your federal student loan first and then work on the private ones.
If you have loans from the federal government, they can either be subsidized or unsubsidized. If you have unsubsidized loans, it is best to pay them first because they accrue interest during school and after your grace period.
Did you know which kind of loans you have? Click on your account and see the name of the loans. If they are “federal,” “subsidized”, or “unsubsidized,” then you have federal loans. You can also call your loan servicer’s customer service department to find out. Some companies that do not service federal loans may service private ones, so make sure to ask for which type of loan you have when calling them.
What is your interest rate?
If you want to pay back your debt as cheaply as possible, you can look at the interest rate on those debts. The debt avalanche method is when you try to pay off the debts with the highest interest first. For example, if you have a loan with 10% interest and one with 7%, make extra payments on the 10% loan until it’s paid off and make minimum payments on the 7% one.
If you have different loans through different interest rates, the debt avalanche method is usually the fastest way to pay them off. This will reduce your interest payments on each loan. You can also use this method with refinancing – combining all your loans into one private loan at a lower rate.
You might have some debt. How much?
You have many loans with different balances. You can use the debt snowball method. This means that you repay the loan with the smallest balance first, then go to another one until it is all repaid. This will make a huge dissimilarity in your life because you will be out of debt more quickly.
Follow us on Twitter
There are two different ways to pay off your debts. One way is the debt avalanche method. This means that you take all of your money and put it towards your loan with the highest fascinate rate first, so you can get rid of it quickly. The other way is called a debt snowball method. With this one, you start with your smallest amount of debt and then use what little money you have left to pay for it. You keep doing this until all your debts are gone!
The snowball method only focuses on the total balance. You might have to pay more in interest, so you should use this method when your rates are close together.
Other things that you may want to think about when you are paying off your student loans.
It’s good to want to pay off your student loans quickly. But you also need to make sure that this does not interfere with other goals, like saving up for retirement or buying a new house.
It is not good to use money in your emergency fund for anything not an emergency, like paying down your student loans. You should save money for emergencies, like when you fly into town for a funeral, or you need to take your caress to the vet. If you do not have an emergency fund yet, it’s time to make one before you put more money into paying off student loans.
It is important to think about other expenses and debt before making extra payments on your student loans. The interest rates on pupil loans are usually lower than those for other debts. If you have a student loan with a 5 per cent interest rate and a credit card with a 16 per cent interest rate, make sure you pay your credit card bill off in full every month.
Also, Read What Happens to Student Loans When You Die?