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Paying off your student loans early can potentially save you thousands on interest — especially if you have long loan terms. It’s important to be strategic while making those extra repayments so you can save even more and get out of debt faster.
It depends on your situation. Generally, you can save the most by paying off your high-interest loans first. This usually means beginning with private loans, which tend to have higher rates than federal or provincial funding.
You also might want to consider the size of your loans. A small loan with a high interest rate might not be worth paying off first before a larger low-interest loan.
Follow some — or all — of these 8 tips to figure out which loans to repay first.
Before you get started, take a look at all of your student loans. Make a list of which have the highest rates, highest balances, highest monthly repayments and highest total cost.
Also, consider benefits like deferment and forgiveness — you might want to hold off on making extra repayments on loans with these options if you’re planning on going back to school.
You can find most of this information on your student loan servicer’s website — that’s the company you repay your loans through.
Or you can use our monthly loan payment calculator to find out how much interest you’ll pay in the long run and your monthly cost for each loan.
Chances are your private student loans have higher interest rates than any of your federal loans. Beyond this, private student loans typically have fewer options for deferment and forgiveness.
Do you have multiple private loans? If they’re roughly the same size, start with the loan with the highest rate first. If one is smaller than the other, crunch some numbers to figure out how much you could save by shortening your loan term.
As a full-time student, your government loans are subsidized – which basically means that the government pays the interest on your loans while you’re in school or in deferment. If you’re a part-time student, you may be responsible for paying the interest yourself. So it makes sense to pay off any unsubsidized loans before starting on any subsidized loans.
It won’t matter which loans you repay first if your repayments only cover unpaid interest. That’s because interest is a percentage of your loan balance — the lower the balance, the less interest you’ll pay.
In most cases, simply making an extra repayment to your servicer is not enough. Often, this will put you in “paid ahead” status, meaning you’ll simply owe a reduced amount the next month. Other times, your repayment will automatically go toward any unpaid interest before the principal.
Reach out to your servicer to arrange how you’d like your repayments to be applied. Most have a specific procedure for this.
Trading your student loan for a better deal can save you money. It can also buy you some time to focus on higher-interest loans. You might want to consider it if you have strong credit, a high-paying job and multiple high-interest loans.
But the right choice is different for everyone. You can learn more about how you can benefit by reading our guide to student loan refinancing.
Before applying for a personal loan, contact the lender to see if they allow you to refinance the specific type of student loan that you have (federal, provincial and/or private).
When the economy is doing well, variable interest rates often increase — making both your monthly repayments and total loan cost more expensive.
If you have both fixed- and variable-rate private student loans, consider whether the Bank of Canada has plans to increase rates. If so, you might want to pay off your variable-rate loans first.
Short on time to sit down and really crunch the numbers? You might want to use a debt repayment strategy instead, such as one of these popular methods:
Not sure which option to choose? Read our article on debt avalanche vs debt snowball methods to help you decide — or opt for a combination of the two.
While paying off loans with a cosigner first might not save you the most money, you still might want to give them extra attention. If your cosigner is thinking about taking on debt of their own — whether applying for a mortgage, car loan or new credit card — lessening their debt load can help them qualify for more competitive rates. You can also look into applying for cosigner release if it’s an option.
Getting out of debt ahead of schedule might seem like a no-brainer. But there are situations where it might not be the best decision:
Repaying your student loans ahead of time can help you save big on interest and shorten the path to debt freedom. But you can save even more if you have a well thought-out plan. Even if you’re struggling with repayments, paying it off strategically can save you in the long run.
Want to learn more about how repayments work? Read our guide to student loans.
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