After graduation and a possible grace period, it’s time to start paying back your student loans. But if you have a lot of loans, it can be hard to determine which student loans to pay off first.
Before you begin structuring your repayment plan, make sure you’re making minimum monthly payments towards all your loans. Even if you start making a plan to pay off your loans after the grace period is over, it’s important to stay current on all your bills. Late student loan payments and non-payment can cause you to go into default, which can derail your credit score.
Now, here’s your step-by-step plan to help you manage your loans and figure out which student loans you should pay off first.
Step 1: Get your student loans in order
If you have many different student loans, it can be hard to keep track and get them in one manageable place. Create a document or spreadsheet that details:
- Your lender(s)
- The total amount you owe for each loan
- Minimum payment
- Monthly payment due date
- Cosigners (if any)
- How you pay (online, auto-pay, check, etc.)
If at any point you’ve consolidated or refinanced your loans, make sure that’s in your spreadsheet.
Step 2: Decide which loans to focus on first
Now, there are a couple of helpful methods to choose from when it comes to figuring out which loans to focus on first.
1. Private student loans
Best for: Anyone who has private student loans.
Private student loans tend to have high interest rates compared to federal student loans. Because of this, you might want to wipe those out before turning to federal student loans. You can continue to make minimum monthly loan payments like usual, but put all your extra cash towards private student loans until those are complete.
2. Loans with the highest interest rate
Best for: Anyone motivated by saving the most money, even if it might take longer to pay off a loan. You’ll save the most in interest over the life of your loans with this method.
Once you’ve outlined all your loans, you can choose which repayment plan best suits your financial situation and budget. The debt avalanche technique requires you make minimum payments on all your loans. But with this strategy you’d make bigger payments towards the highest interest loan. So, once you’ve tackled your private student loans, move on to the next loan with the highest rate.
Because high-interest loans can cost you more in the long-term, you tackle these first. Use any extra income you can to pay off the loan with the highest interest. Then, when that loan is paid off, you can use all that new money towards the next-highest interest rate loan. You’ll do this until all your loans are paid off.
3. Loans with the lowest balance
Best for: Anyone who’s motivated by quick wins (even if they’re small). You’ll start paying off loans more quickly which could jumpstart your student loan debt payoff.
Instead of concentrating on high interest, you could use the debt snowball method — which concentrates on loans with the lowest balances. With this method, you’d make your minimum payments so you’re up-to-date on all your loans, with any extra cash going towards the loan with the smallest balance. Once your lowest loan balance is paid off, put all extra cash towards the next lowest loan balance. Continue until all your loans are paid off.
Step 3: Consider consolidation or refinancing
Staying on top of many different loans can get confusing. While your handy spreadsheet is helpful, it could be limited. You might want to think about student loan refinancing or consolidation.
- Consolidation: This is only available for federal student loans. All your federal loans are combined and your interest rate is the weighted average of your loans. Your monthly payment might not be lower than what you were paying before, but it does make it more manageable with one payment.
- Refinancing: This is open to federal loans, private loans, or a mix of both. Student loan refinancing is a form of consolidation, but instead of combining all your loans, you’ll get one new loan to replace all your loans. This includes a new interest rate and terms.
To qualify for refinancing, lenders will check your credit score to make sure you’re a viable candidate to loan money to. If you don’t have a great credit score, you might need to get a cosigner.
Both consolidation and refinancing are good options to help manage your loans, but they aren’t for everyone. If you have higher interest rates than what you’d pay without doing so, they might not be worth it.
Additionally, this starts you with a new loan term, or how long it’ll take you to pay back your loan in full. If you’ve been paying off your loans for a while, refinancing will start a new term. This could mean you’re paying your loans off for a much longer time than you anticipated. You’ll also lose any federal protections — like student loan forgiveness — if you refinance your federal loans.
However, if you’re early on in your repayment plan and you can get a lower interest rate than what you’re paying now, refinancing your student loans might be worth it. Make sure you review many different lenders to check out loan terms before signing up.
Step 4: Start using the method that works best for you
Once you’ve laid out your loans and budget, you can see all your income and bills at a glance. If you realize you don’t have any extra money to put towards paying more on your student loan debt, it’s OK. You don’t need to pay off your student loans early. As long as you’re continuing to make minimum monthly payments until you can get more cash to put toward extra payments, your credit score will get a boost and you can explore other student loan repayment options down the road.
The important thing, aside from paying at least the minimum balance of all your loans on time, is that you find a method that works for you. Review them all to see which one makes the most sense for your financial situation, and start using it as soon as possible to get results.