You’re saddled with student loans and don’t even know where to start. When you’re dealing with multiple lenders, different interest rates, and varying balances, loan repayment can become difficult to manage.
Which loans do you pay off first? How do you create a repayment plan? In this post, you’ll find out what to pay off first and how to devise a plan to conquer your student loan debt.
1. Make Private Loans a Priority
When you have multiple loans, including federal and private student loans, all at various interest rates, it can feel overwhelming to begin paying off your debt. Where do you even start?
As a borrower, you should focus on paying off private student loans first, because these loans allow far less flexibility in how they can be managed. This truth becomes particularly clear when you look at repayment options, which often dictate a fixed minimum payment without any flexibility.
Plus, private loans don’t come with the same benefits as federal loans, including income-based repayment and loan forgiveness. Accordingly, it’s smart to make private loans your priority and to pay them off as quickly as possible.
2. Focus on Federal Loans
Just because you’re prioritizing your private loans, that doesn’t mean that you can neglect paying off your federal loans. It simply means that you need a strategy.
For instance, you might consider paying the minimum on your federal loans until your private loans are completely paid off. Then, you should put money toward your federal loans that you would have otherwise paid toward your private ones.
If you have federal loans only, then focus all of your energy on reducing your loan balances until you’re entirely out of the red. When paying back your federal loans, make sure to choose the right repayment plan for your financial life and goals.
A standard 10-year repayment plan usually allows the fastest repayment of student loans. But if you’re struggling to pay off your debt, then you could consider opting for income-based repayment.
It’s crucial to take advantage of the flexibility and options that come with federal loans if you really need them. At the same time, don’t choose a plan with a longer timeframe or a lower repayment scheme if you know that you can afford to pay off more. Remember, the goal is to overcome debt—the sooner, the better.
3. Consider Refinancing
If you have both federal and private student loans, then you may be dealing with high interest rates and multiple lenders, both of which can seem like major obstacles. While managing multiple payments can be difficult, paying so much in interest can be frustrating.
However, there are alternatives. With student loan refinancing, you could be approved for a better interest rate and be able to consolidate your loans into one monthly payment.
Whether you have both federal and private student loans or only private ones, refinancing can be a smart choice. Typically, lenders prefer candidates with good credit scores, steady employment, and enough income to pay off their loans.
Since each lender has its own eligibility requirements, compare them to see whether any suit your needs. If you have federal loans only, then you could be better off keeping your current plan, since refinancing doesn’t offer benefits such as income-based repayment and loan forgiveness.
However, if you’re burdened with PLUS loans and a 7% interest rate, then you may benefit from refinancing and could even save thousands of dollars. Review your options carefully, and remember that refinancing is always something to consider.
4. Devise a Plan
Now that you know which loans to pay off first—begin with the private ones, then move on to the federal ones—and to always making at least the minimum payments for all of them, you need a plan.
How will you achieve debt freedom? Luckily, there are a variety of methods from which you can choose or even mix and match to reach your goal of becoming debt free.
- The debt avalanche method involves paying off your loan with the highest interest first while paying the minimum amount on the others. I’ve subscribed to this method, and I just paid off my very last 7.9% interest loan! Now, I’m moving on to the rest, all at 6.8%. Using the debt avalanche method, you can save a lot of money in interest.
- The debt snowball method involves paying off the loan with the smallest balance first and paying the minimum amount on the rest. If you have loans of $2,000, $8,000, and $13,000, then focus on the $2,000 loan first. This method is praised by personal finance guru Dave Ramsey for the psychological wins that you gain, in the sense that paying off the smallest balance first helps to build momentum, which can be highly motivating.
While one method comes down to math, the other affords motivation. Though both methods work, it’s important to choose one to begin chipping away at your debt. With either method, you can also do the following in conjunction:
- Baby Steps: Dave Ramsey, who has inspired many people to overcome debt, has created a signature 7-step plan toward debt freedom.
- Spending Diet: Created by Anna Newell Jones, this plan caps non-needs spending at $100 per month. By limiting your expendable income to $100 each month, you can still have some fun while putting most of your discretionary income to debt.
Though student loan debt can be a beast to manage, it’s always easier with a plan. Here’s what to pay off first:
- Focus on private loans first.
- Continue to make minimum payments toward your federal loans, and choose a repayment term that works for you.
- Consider refinancing—carefully.
- Choose either the debt snowball or avalanche method.
- If you want some extra help, then add on the Baby Steps or Spending Diet methods to stay on track. Remember, a goal without a plan is just a wish, so create a plan that works for you and get started. Debt freedom, here you come!
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.97% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate|
|2.46% – 6.97%1||Undergrad & Graduate|
|2.57% – 8.44%4||Undergrad & Graduate|
|3.05% – 6.47%2||Undergrad & Graduate|
|2.50% – 7.24%5||Undergrad & Graduate|
|2.79% – 8.39%6||Undergrad & Graduate|