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.
Which student loans should I pay off first?
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.
How to decide which student loans to pay off first
Follow some — or all — of these 8 tips to figure out which loans to repay first.
1. Figure out which loans are the most expensive
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.
Where do I get information about my loans?
You can find most of this information on your student loan servicer’s website — that’s the company you repay your loans through.
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.
3. Pay off unsubsidized loans before subsidized loans
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.
4. Make sure repayments go toward the principal first
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.
5. Look into refinancing
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.
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.
Is paying off my student loans early the right choice for me?
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:
You’re planning on applying for forgiveness. Paying off your student loans ahead of schedule when you’re set to apply for forgiveness might actually mean you’ll pay more.
You’re struggling with credit card debt. Credit cards generally have much higher interest rates than student loans. If you have a choice between the two, consider focusing on your credit cards first.
You don’t have an emergency fund. Financial experts recommend having three to six months saved up to cover personal expenses in the event that you lose your job, get into an accident or have another emergency. You might want to save for an emergency fund first, then focus on making extra repayments on your student loans.
You don’t have a retirement plan. As a millennial carrying student debt, it might feel like you’ll never save enough for retirement by the time you finish paying off your loans. So it’s worth considering starting to save for retirement now instead of making extra payments on your student loans.
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.
You might want to prioritize paying off your car loan over your student loans. That’s because car loans typically have higher rates and are less flexible if you have trouble making repayments — there’s generally no deferment or forgiveness on car loans. Just make sure your lender doesn’t charge an early repayment penalty.
It depends on your repayment plan. With a standard repayment plan, repayments go toward both interest and the loan principal. However, if you have an income-driven repayment plan or a deferred plan, some or all of your repayments might only go toward interest, depending on the loan.
It depends on the type of loan you have. Your federal student loans will be sent to the CRA for collections after missing 9 months of repayments. With private loans, your loan typically goes into default after 30 to 90 days of missed repayments, depending on your lender.
Though experts generally consider both to be “good debt,” a mortgage is usually considered better since you’re continually building equity in your home with every monthly repayment. The same can’t be said for student loans.
Anna Serio is a trusted lending expert and certified Commercial Loan Officer who's published more than 1,000 articles on Finder to help Americans strengthen their financial literacy. A former editor of a newspaper in Beirut, Anna writes about personal, student, business and car loans. Today, digital publications like Business Insider, CNBC and the Simple Dollar feature her professional commentary, and she earned an Expert Contributor in Finance badge from review site Best Company in 2020.
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