Which student loan should I pay first?

Choosing which student loan to start paying is only the first decision you need to make for your loan repayment strategy.

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For students who graduated this past spring, the first student loan payments will be coming due shortly. Most students have multiple student loans, and a common question usually comes up: which student loan should I pay first?

This may sound counter-intuitive, because you should pay all your loans, at least the minimum payment each month. But where should you focus any extra resources? Let's dive in.

Always Make The Minimum Payments

The first thing to remember when it comes to student loan debt is that you always need to make the minimum payments on every loan. If you're struggling to make the minimum payments, make sure that you're on the best repayment plan for your situation. Most Federal student loans offer income based repayment plans that can help lower the monthly payment to match your ability to pay.

Failing to make the minimum payments each month can have serious consequences to both your credit score, and your ability to qualify for government programs regarding your debt. If you fail to pay your Federal loans for an extended period of time, your loan goes into default and the government can actually garnish your wages and your tax refund to pay back the debt.

So, no matter what, make your minimum payments each month.

Focus On Private Loans First

If you have some extra cash to put towards other loans (say you've been working a side job to earn extra cash), you should focus on getting out of private student loan debt first.

Private student loans are the least flexible when it comes to repayment – they typically don't offer income based repayment plans, and they don’t offer student loan forgiveness programs.

If you're struggling to make the payments on a private student loan, your only option to lower the payment is to refinance the loan. There are comparison sites like Credible which allow you to fill out an online form and will show you the best loans from various lenders. This can be a great way to lower your payment while you focus on paying your private student loans.

Create a Debt Snowball Or Avalanche

Finally, once you've eliminated your private student loan debt, you can focus on eliminating your Federal student loans. The best way to do this is by focusing on a debt snowball or debt avalanche method.

The debt snowball method, which is one of the main ways Dave Ramsey advises to pay off debt, focuses on aggressively paying off your smallest balances first, while making minimum payments on the rest. The goal is that creating small wins for yourself by paying off the low balance loans will give you motivation to continue to aggressively pay down the next loan.

In contrast, the debt avalanche method has you focus on the highest interest rate loan first. This method has you address the highest cost loan, and then once it's paid off, you roll all of the payments you were making into the next loan, and so forth. This method doesn't give you the quick wins of the debt snowball method, but it does save you money in total payments over the whole process.

While the choice is personal, the debt avalanche method is mathematically the better way to go.

Conclusion

Now that you have a good framework for paying back your student loan debt, you can prioritize which loans to aggressively focus on, and work towards getting out of student loan debt the smart way.

Topics:
  • Student Loans
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This article was written by Carl Richards from The New York Times and was licensed as an article reprint. Article copyright 12/15/2015 by The New York Times.
The statements and opinions expressed in this article are those of the author. Fidelity Investments cannot guarantee the accuracy or completeness of any statements or data.
This reprint is supplied by Fidelity Brokerage Services LLC, Member NYSE, SIPC.
The third party provider of the reprint permission and Fidelity Investments are independent entities and not legally affiliated.
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