Which Student Loan to Pay off First?

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For many students, college can be the beginning of an exciting time! It is an opportunity for students to grow both socially and academically and has proven to have many long-term benefits. However, navigating the expenses of college can be quite confusing - especially student loans.

Unlike other forms of financial aid, student loans are required to be paid back upon completing your degree. The due date for these monthly payments will be contingent on the type of loan it is and may vary slightly among both.

There are currently two different forms of student loans: Federal and private student loans. In short, federal student loans come from the federal government, while private loans are offered through a third-party organization including, but not limited to, banks and credit unions.

While Federal student loans offer more flexibility and are preferred by students, it usually falls short when calculating all academic expenses. To cover the rest, students are forced to take out multiple student loans whether that be more federal or private. Having a mix of federal and private loans may be a little tricky and requires a strategic repayment plan to avoid student loan debt.

To determine an effective game plan, it is best to first identify all the student loans you have accumulated throughout the years. Understand their interest rates, when they accrue interest, and due dates in conjunction with any other loans you may have. Without considering these factors, you may setback some of your financial goals.

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Interest Rate

An interest rate is the percentage of your loan amount that your lender charges extra for borrowing. It is a crucial factor to assess when taking out a loan because it determines how much extra you will have to pay off in the long run.

These rates can either be fixed or variable. A fixed interest rate implies that the rate will remain consistent throughout the time of the loan, while variables can fluctuate over time.

A higher- interest rate means it's more expensive, which will be evident in the payments you make going forward. To pay as little as possible, it is best to follow the debt avalanche method, which prioritizes high-interest loans.

With this method, you pay little interest rates as fast as possible to secure stable financial growth. It is always best to start with the heaviest anchor before moving to the others.

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Private student loans reputably have higher interest rates than federal student loans. Federal loans offer undergraduate and graduate students low fixed interest rates with the exception of parent PLUS loans.

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In cases where you have both private and federal loans, always try to pay first private student loans early. Depending on the lender, they can also have a variable interest rate, which may make life harder with a fluctuating monthly payment.

Furthermore, unlike federal student loans, they do not offer extra programs such as income-driven repayment plans, deferment, or loan forgiveness. Given this, it will provide greater peace of mind to have those out of the way first.

If you do not own any private student loans, solely federal student loans, then there are also ways to navigate which ones to prioritize. Typically, independent students with no children take out either direct subsidized loans or direct unsubsidized loans.

While the interest rate and repayment timeline for both these loans are rather similar, they differ in when they begin accruing interest. Both loans offer a grace period where borrowers are exempt from making payments until six months after graduation.

However, unsubsidized loans still accrue interest during the grace period. If you do not make any payments during college enrollment, then your loan amount will exceed subsidized loans by the time you are ready to begin the repayment plan. You ultimately want to tackle unsubsidized loans first due to their interest rate head start.

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Debt

Another way of getting rid of student loans efficiently is by utilizing the debt snowball method. Often, when dealing with multiple lenders, it can become overwhelming to begin or know where to start.

This method recommends borrowers prioritize debt with the smallest balance while continuing to make minimum payments on all other loans. It is only after that loan is completed that you can move on to the next one with the lowest balance.

This avenue can be motivating as you visualize change more quickly. Completing every student loan makes you one step closer to getting out of debt.

At the end of the day, student loans vary for everyone. The best method will be contingent on the types of loans you have as well as their interest rates. It is just important to remember to pay student debt as fast as possible because otherwise, it could hinder your financial future.

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How Long Does it Take to Pay off Student loans?

It largely depends on the type of loan, interest rate, and selected repayment plan.

Federal student loans

For most federal loans, the standard repayment plan is ten years. This timeline is expected by all borrowers upon graduation, but if eligible you can opt for a different federal repayment plan.

You may apply for one of the four income-driven repayment plans, which will base your monthly payments on your income and whether it is used to fund any dependents such as children.

While this will decrease your monthly payments, it will also push back the timeline by many years. In some cases, it can take about 25 years to pay student loan debt off completely, but it can potentially qualify you for loan forgiveness in later years.

If you consistently pay more than your required minimum payments, then you may be able to pay it off well before the standard ten years. If all other high-interest loans are paid off, then there are no penalties for completing federal loans early.

Private student loans

Since private student loans come from a variety of different places, there is no singular answer as to when they will be paid off. It is typically around 5-20 years but can be more or less should you choose to refinance the loan.

Check out Bold.org’s U.S. Student Loan Research Report for more information on student loans.

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What is the difference between refinancing and consolidating?

If you have or are going to take out student loans, you might hear discussions regarding refinancing or consolidating. It is important to remember that paying off student loans does not have to be a linear process.

Borrowers who are consistent with their monthly payments and foresee difficulty with their debt are eligible for plans that help alleviate the burden in some way. Refinancing and consolidating are two common ways for borrowers to replenish their loans to be under better terms.

Refinancing

Refinancing is the process of taking out a new loan to pay off the initial one. Typically, the new one has a lower interest rate and quicker repayment plan to pay debt faster.

To qualify, you must meet with private lenders and differentiate between their interest rates to find the deal for you. Lenders will often ask for your credit score which will indicate the interest rate given - a higher score equates to a lower interest rate. If your credit does not meet the minimum requirement, then you will be asked to find a co-signer.

In the long run, refinancing can have many benefits, including saving you thousands in interest. If you have high-interest private student loans, then refinancing may be a good option for you.

However, refinancing can be damaging if used for federal student loans. The U.S. Department of Education offers many benefits exclusive to federal loans, such as loan forgiveness, student loan repayment assistance programs, income-driven repayment plans, and generous deferment and forbearance options.

Especially with the Biden administration introducing a student loan forgiveness program, it might be beneficial to avoid refinancing a federal student loan.

Consolidating

Consolidating refers to the direct consolidation loan which is solely for federal loans. Similar to refinancing, it allows a borrower to replace a loan to pay off the others. It can simplify monthly payments as a singular new loan can take the place of all the others, requiring only one payment.

It can also give access to exclusive federal income-driven repayment plans to extend the timeline to 30 years and decrease monthly payments. This extension will decrease your monthly payment making it more bearable.

Unlike refinancing, however, you do not get a lower interest rate. The new loan's interest rate will be the weighted-average rate across all of the loans you’re consolidating, rounded up to the nearest one-eighth of a percent. In the long run, you pay the same amount but for a longer period of time. It is a great option for borrowers that are struggling with monthly payments.

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Frequently asked questions about which student loans to pay first

Is it better to pay student loans off all at once?

While paying off your student debts all at once may be financially advantageous, it isn't necessarily the best course of action. Keeping your student loans and paying monthly gives you a longer credit history. Not paying in full will also allow you to budget for emergency funds. However, you will pay less interest by paying off your student loans all at once.

At what age do most pay off student loans?

The age range in which student loan borrowers pay off their student loan varies. It takes roughly twenty years to pay off student loan debt, depending on the type of loan, the interest rate, and the borrower's financial situation.

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