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Deciding Which Student Loan to Pay Off First

Deciding Which Student Loan to Pay Off First
Rebecca Safier
Rebecca SafierUpdated April 8, 2023
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If you took out multiple student loans to pay for school, you might be wondering which student loan to pay off first and is it better to pay off subsidized or unsubsidized loans. While it’s important to keep up with the required payments on all your loans, you may want to pay off certain types of student loans faster than others. There are a few strategies you can use to prioritize your debts, including the debt avalanche and debt snowball method. Generally speaking, it’s a good idea to tackle the loans with the highest interest rates and fewest borrower protections first. Here’s how to get started.

Types of Student Loans

If you’re debating which student loans to pay off first, it’s important to understand what kind of student loans you have, such as federal or private student loans. These are some types of student loans you may have borrowed for college or graduate school. 

Direct subsidized loans 

Direct subsidized loans are federal student loans that are offered to undergraduate students with financial need. The government pays the interest while you’re in school and during your grace period for six months after school. Direct subsidized loans for the 2023-24 academic year have an interest rate of 5.50%.

Direct unsubsidized loans 

Direct unsubsidized loans are federal student loans that don’t have a financial need requirement. Anyone can borrow these loans, including both undergraduate and graduate students. Unlike their subsidized counterparts, Direct unsubsidized loans start accruing interest right away. They currently have an interest rate of 5.50% for undergraduates and 7.05% for graduate students in the 2023-24 academic year.If you’re wondering, is it better to pay off subsidized or unsubsidized loans, the answer is usually unsubsidized loans. Because unsubsidized loans begin to accrue interest immediately, you stand to save more by paying them off faster. 

Direct PLUS loans 

PLUS loans are federal student loans designed for graduate students or parents of undergraduates. They currently have interest rates of 8.05% in the 2023-24 academic year.Graduate PLUS loans might be taken out by grad students after they’ve maxed out their eligibility for Direct unsubsidized loans, which come with borrowing limits. Some parents also take out PLUS loans to help their child pay for college.

Direct consolidation loans 

The federal government also lends Direct consolidation loans to borrowers who want to consolidate their federal student loans. A consolidation loan combines multiple loans into one, and lets you choose a new repayment plan. The interest rate on a consolidation loan is the weighted average of your previous loan rates rounded up to the nearest one-eighth of a percent. Federal student loan consolidation is also one way to get past-due federal student loans out of default. 

Private student loans 

You may have borrowed private student loans from a private lender, such as a bank, credit union, or online lender. Private student loan interest rates vary, with the best rates usually going to borrowers with the highest credit score. Private student loan rates may be fixed or variable. If you borrowed a private student loan as an undergraduate, chances are you had a parent or other adult apply with you as a cosigner. These loans don’t qualify for federal repayment plans, forgiveness programs, or other federal protections. 

Does it Matter Which Student Loan You Pay Off First?

When you have student loan debt, you’ll need to keep up with the bills on all your loans to avoid going into delinquency or default. If you have some extra cash in your budget, though, you could make additional payments to speed up how long it takes to pay off student loans. In this scenario, it’s a good idea to be strategic about which student loan you pay off first. Choosing your student loan repayment approach wisely could save you a significant amount of money, as well as boost your motivation to keep chipping away at your debt. 

Is It Better to Pay off Subsidized or Unsubsidized Loans?

If you have both subsidized and unsubsidized student loans, it’s usually a good idea to tackle your unsubsidized loans first. Unsubsidized student loans accrue interest right away, so they’ll have larger interest charges and a higher balance than subsidized loans. If you can swing it, you could make payments on your unsubsidized loans while you’re in school. Even though payments aren’t due until six months after you graduate, making small or interest-only payments from the beginning can prevent your balance from ballooning while you’re pursuing your degree. 

Paying Off Federal vs Private Student Loans First

When it comes to which student loans to pay off first, if you owe a mix of federal and private student loans, it’s often wise to prioritize paying off your private student loans before prepaying your federal loans. Here’s why: Private student loans may come with variable interest rates, which are unpredictable and can increase over time. If your rate increases, your costs of borrowing will go up, as well. Second, private student loans are not eligible for the same range of protections that federal student loans are. Federal student loans come with a slew of borrower benefits, including income-driven repayment plans, deferment, forbearance, and forgiveness programs. Chances are, your private student loan has a higher interest rate and fewer borrow protections than your federal student loans. If you can afford extra payments, it may make sense to apply those to your private student loan first. 

Paying Off Student Loans With the Highest Interest Rate

When figuring out which student loan to pay off first, consider the debt avalanche strategy. This method involves making extra payments on the student loan with the highest interest rate first. To use the debt avalanche approach, make a list of all your student loans from the highest interest rate to the lowest. Make extra payments on the loan with the highest interest rate first. Once you've paid off the balance in full, move on to the loan with the next highest rate. Because you start by paying off student loans with the highest interest rate, you’ll save the most money with this strategy. An alternative strategy is the debt snowball, in which you pay off loans with the smallest balance first. The debt snowball won’t save you as much money as the debt avalanche, but it might feel motivating to watch your small-balance loans disappear. Finally, if you owe high-interest private student loans, you could also explore refinancing them for more favorable terms. When you refinance student loans you may qualify for a lower interest and new repayment terms.

Paying the Principal vs Paying Off Interest First

When it comes to paying off student loans, it’s important to understand the difference between your principal balance and interest charges. Your principal is the amount you borrowed, whereas interest is the cost of borrowing money, usually expressed as a percentage of your loan amount. When you make monthly student loan payments, a portion of your payment is applied to interest charges and the rest is applied to the balance. If you make extra payments, make sure your loan servicer is applying the payment to your principal balance and not using it on interest or saving it for a future bill. By instructing your loan servicer to apply your extra payments to your principal, you can pay down your loan faster and save on interest charges. 

Is It a Good Idea to Pay Off Student Loans Early?

Paying off student loans early can be a good idea if you can afford to make extra payments. You’ll get out of debt faster and save money on interest. At the same time, however, you need to meet your other financial priorities. Before prepaying your debt, for instance, it’s usually a good idea to save an emergency fund. It’s also smart to start saving for retirement as soon as possible, especially if you work for a company that offers a 401(k) match. Finally, you may want to balance your student loan payment with other debts. If you owe credit card debt at a 17% rate and student loans at a 5% rate, for instance, it’s a better idea to tackle your credit card balance before prepaying your student loans. 

Finding the Right Student Loan Repayment Strategy

The right student loan repayment strategy depends on your financial circumstances and goals. If you’re struggling to keep up with payments, look for a way to reduce your bills, such as an income-driven repayment plan. Depending on your profession, you can also explore options for federal student loan forgiveness programs. Some states and companies also offer student loan repayment assistance to qualifying borrowers. On the other hand, borrowers with some additional room in their budget might consider accelerating their debt repayment. In this case, consider making extra payments on your student loans with the highest interest rate and fewest borrower protections. 

The Takeaway

Paying off student loans faster can help you get out from under the shadow of your education debt. When deciding which student loans to pay off first, consider the debt avalanche method, which tackles the loans with the highest interest rate first. Make sure your loan servicer is applying your extra payments to your principal balance, rather than using them on interest or saving them for a future date. You can also consider refinancing private student loans, especially those with high interest rates, to get better rates and new repayment terms. Lantern can connect you with student loan refinancing offers from multiple lenders all at once so you can compare them to choose the best option.Check your student loan refinancing rates with Lantern.

Frequently Asked Questions

How do I choose which student loan to pay off first?
Is it better to pay off subsidized or unsubsidized student loans first?
Is it better to pay off private or federal student loans first?
Photo credit: iStock/erdikocak
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About the Author

Rebecca Safier

Rebecca Safier

Rebecca Safier has nearly a decade of experience writing about personal finance. Formerly a senior writer with LendingTree and Student Loan Hero, she specializes in student loans, financial aid, and personal loans. She is certified as a student loan counselor with the National Association of Certified Credit Counselors (NACCC).
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