It’s not uncommon to have a handful of loans you’re trying to pay off all at once.
When you have so many weighing you down, you’ve probably asked if you’re better off paying them down equally or if you should put more money into one.
Before I answer that, let’s get three things out in the air.
First, there are few instances when it makes sense to let a loan go into default. The consequences — especially with federal student loans — are severe. So, yes, you should try to pay off certain loans first. But that doesn’t mean you stop making payments on the rest of your loans. We’re talking about where to put some extra cash.
Student loans don’t hurt your credit score. Defaulting on student loans will.
On a private loan, you’ll go into default after 30 days. The same is true of Federal loans after 270 days.
Second, make the smallest payments you can on loans that qualify for forgiveness.
If you know you’ll be eligible for PSLF, don’t try and pay it off. Just make sure you’re consistent in your payments so you can achieve forgiveness in the end. The same is true of other forgivable debts.
Third, make sure you have a clear understanding about student loan debt consolidation.
I typically recommend that you don’t consolidate your Federal student loans with a private lender. It’s not worth the higher interest rate that typically comes with debt consolidation loans.
Having said that, there are times when I do recommend consolidating your federal student loans with the Department of Education
You can read about those here.
With those three issues out of the way, let’s talk strategies.
What methods can I use to pay off multiple student loans?
There are a few methods out there, but typically, most advice falls into two camps.
The first is the debt snowball method popularized by Dave Ramsey.
This means you start with your smallest loan and continue paying them off until they’re all gone.
The idea is you’ll gain momentum and make small steps to overcoming a large obstacle.
All in all, the debt snowball isn’t a bad approach. If you’ve never paid off loans before, it may give you small victories you need to tackle those bigger loans.
Still, because of the variety of different student loans, a better strategy involves considering the specifics of each loan.
That’s the camp I fall into.
What should I look at to determine which loan to pay off first?
As a rule of thumb, you should pay off private loans before Federal loans.
The reason is simple: private loans often have bigger interest rates and are unsubsidized.
If it so happens that your Federal student loans have greater interest rates, then start with those. But generally, it’s the private loans that have the worst rates.
The math is pretty simple. Imagine you have a $10,000 loan with a 4.5% interest rate and a $10,000 loan with an 8% interest rate, and five years to pay off both. You’ll end up paying $12,165 on the 8% loan and $11,267 on the 4.8% loan. Paying the loan with the highest interest rate will save you money by the end. In this case, almost $1000.
Time is a real killer here as well. That $10,000, 8% loan?
Let’s say you take ten years to pay it off instead of five. It will cost you an additional $2,000+ in interest.
Put your extra cash towards high-interest loans to pay them off faster.
I also mentioned that most private student loans are unsubsidized. What does that mean?
It means the loans you take out during school accrue interest that is added to your principal. This is known as capitalization.
You probably deferred those loans during school, but still, the interest kept piling on.
A subsidized loan, on the other hand, is more commonly a Federal loan. While you were in school, in deferment, or during a six month grace period post-graduation, the government paid your interest.
I’d still recommend paying off the loans with the highest interest rate first, private or Federal.
While capitalization hurts, once you’re ready to start making payments, most of the damage has been done. You just have a higher principle to tackle.
Let’s take a look at your case together.
As a student loan lawyer, I’ve seen every combination of loans imaginable. We can walk through your situation together to develop a plan and determine a path forward.