Dear Student Loan Hero,
I left school with a handful of student loans and am now wondering about the best order to repay them. I’ve heard about the benefits of paying off loans according to their interest rates, but I’m still curious if I should pay off private loans before federal loans. Are there reasons to prioritize loan type over rate? What do you think?
Dear Student Loan Borrower,
I think you’re asking the right questions. Setting a game plan for your student loan repayment is a smart first step, and you want to ensure it’s a step in the right direction.
As you already know, you can potentially save thousands of dollars in interest costs by repaying your loans using the debt avalanche method, where you attack the highest-interest loan and work your way down the list. This way, you pay out less interest to your creditors over time.
You might also be aware of the debt snowball method, whereby you start by paying off your lowest-balance loans. That way, you gain momentum and “snowball” your way through the rest of your loans.
But debating the avalanche method versus the snowball method misses the bigger point at the heart of your question: Should you consider more than just your loan rates and balances when deciding which debt to pay down first?
In a word, absolutely. You should also consider the rules of repayment for each loan.
Some of your federal loans might even be partially subsidized. If you’re wondering which student loans to pay off first, subsidized or unsubsidized, that one’s a no-brainer: The Department of Education pays the tab for accruing interest on Direct Subsidized Loans when you’re enjoying your grace period or in a deferment or forbearance, making unsubsidized loans a higher priority.
Although private loans might feature an economic hardship forbearance program, it’s generally better to pay them off first because they don’t come with other safeguards (and they’re not subsidized). A private loan could enter default after a single missed payment, for example, while federal loans offer a 270-day window to take action.
Keep in mind: It might generally be better to pay off private loans before federal, but every borrower’s repayment situation is unique.
For example, if your finances are in tip-top shape — strong career prospects and steady income — it’s possible that federal loan protections are less important to you. In that case, you could opt to repay all of your loans aggressively, regardless of the lender. You might even elect to refinance your student loans to consolidate your debt at a potentially lower interest rate, even though it also means giving up federal loan perks.
As you determine which debt to pay down first, here’s some additional reading that could help:
Good luck in life and repayment,
Student Loan Hero
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