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Student Loans 103: Prioritizing Payments (or Which to Pay First)

By William Peacock, Esq. on October 21, 2014 | Last updated on March 21, 2019

OK, you've finally started getting your loans in order. You used the National Student Loan Database System to see what you've borrowed from the feds. You've consolidated, if appropriate, and picked an income-based repayment plan so that your payments are manageable. You're also up-to-date on your monthly payments on any private loans.

But now your career is taking off and you have a bit of surplus cash. And instead of letting the interest build on those loans, you're ready to start dumping your excess cash on one or more of them.

Which one do you pick first? That depends on a few considerations.

Private v. Public Loans

This is the biggest consideration. There is pretty much no forgiveness for private loans, unless you die or become disabled. Even then, they'll probably target any co-signers or spouses.

Federal loans, if you are on an income-based repayment plan, are forgiven after a lengthy number of years -- between 10 and 25 years, depending on your employer (public interest or not) and payment plan.

Because of the possibility of federal forgiveness, all other things being equal, you'll want to target the private loans first.

Interest Rates

Of course, all other things aren't equal, are they? As I previously mentioned, one of my private student loans is sitting pretty at 2.5 percent interest, less than half of the rate of my other loans. That one, then, will probably be paid off last, as I target higher-rate loans.

Compare your interest rates on your loans, and if there are any ultra-high rates, target those first. If there are any ultra-low rates, you're probably best off paying the minimum until your other loans are wiped out.

Outstanding Balance

If you're struggling to make multiple monthly payments, and further loan consolidation isn't an option, you might choose to pay off a loan with a low outstanding balance, even if it has a sweet interest rate, just to get one fewer bill in the mail every month.

For instance, if you have a low-interest $2,000 loan and a higher-interest $87,000 loan, paying off the former loan first will mean that you'll pay more in interest down the road, but you'll have fewer monthly payments to make -- an important consideration if you need a more flexible budget (think shingle-hangers, whose monthly income can vary widely).

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