Lowest Interest Rate Student Loans – If you have more than one type of student loan to finance your education and one of those loans is personal, it’s a good idea to start paying off that loan first. Loans funded by private lenders rather than the federal government do not offer the same protections as federal loans. They usually have high interest rates.
This article will help you understand the difference between student loan types and which ones to address first when starting student loan payments. It’s worth remembering that there are many approaches borrowers can take to paying off student loan debt, and that there is no one-size-fits-all answer.
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Here are some factors and options to consider when deciding which approach to take when managing your student loans.
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To understand which student loans to pay off first, it’s important to understand the different types. There are several differentiating factors between private and federal loans and unsubsidized and subsidized loans.
Regardless of which loan you choose to focus on first, it’s important to make the minimum payments on all of your loans. Because missed payments can seriously affect your credit.
If you have a private student loan, you are dealing with a private lender who bases their loan on creditworthiness. Private loans may require a guarantor and may have higher interest rates and less flexible payment plans than federal loans.
Private student loans can have fixed or variable rates, unlike federal loans, which are usually fixed rate packages. As a result, interest on private loans reflects an underlying index and may fluctuate to reflect interest rates dictated by market conditions.
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The main difference between subsidized and unsubsidized loans is when interest begins to accrue. With non-paying loans, you are responsible for the interest from the start.
With subsidized loans, the Department of Education pays the interest while you attend college. Typically, you don’t have to start paying off your subsidized loan and interest until six months after you stop attending classes (whether you graduate or not). The Department of Education will continue to pay interest during those six months.
A private student loan is any other type of non-student loan that you take out. There are no government protections like deferment and forbearance options or income-based repayment that you get with federal student loans. Some private loans require you to start making payments while you’re still in school – some federal student loans don’t.
It’s a good idea to take out personal loans with high interest rates first. The less you pay in interest, the better. Because of this, it can be beneficial for you to make more than the minimum payment and pay off the principal faster, thereby reducing the interest you pay.
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Since unsubsidized loans accrue interest more quickly than subsidized loans, it’s a good idea to pay them off first.
If you’re considering refinancing or consolidating debt, check the numbers. Federal student loans offer lower interest rates than private loans and much lower rates than some personal loans. For example, federal student loans for graduates disbursed between July 1, 2021 and July 1, 2022 have a fixed interest rate of 3.73%. Compare this to the average annual percentage rate for private loans in 2021, which range from 9.30% to 22.16% was
Paying off a federal student loan with money from a personal loan will likely raise the interest rate and you will lose access to some of the benefits you get from federal loans, as mentioned above.
This federal loan category is subsidized because the federal government – through taxpayers – pays the interest bill you pay while you’re in school. This type of loan is only available to graduate students who have financial needs, so it might not apply to you. If you have this type of loan, this is the last thing you should approach when it comes time to pay it off.
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Once you understand which student loans to pay off first, you can determine the best way to go about doing so. Here are four options to consider:
In the debt avalanche method, you focus on the size of the interest rate rather than the debt amount, as in the snowball method. You pay off the loan with the highest interest rate first. The benefit of this approach is that you’ll spend less money on interest when paying off a high interest rate loan so it can go even higher. As a result, you’ll reduce your total payment and save money – possibly a significant amount.
The downside of this method compared to the snowball method is the psychology behind it. You won’t be able to see progress as quickly, so if you’re having trouble staying motivated to pay down your debt, the snowball method is probably a better choice.
In the debt snowball method, you prioritize your debt from the smallest balance to the largest, regardless of the interest rate you are paying. So, pay as much as possible to eliminate the first (smallest) debt on your list, while paying the least on the rest. This is important because missed payments on your student loans will show up on your credit report and affect your credit score. Autopay can help you make payments on time and get closer to paying off your debt.
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After paying off the first loan, move on to the next one. Now you can take the amount you would have paid on the first loan and apply it to the second one, in addition to the minimum payment you are making. That’s why it’s called the snowball effect. The more debt you pay off, the more money you have to put towards the next minimum loan payment, and so on.
When you follow this method and pay off a loan, it’s important to pay attention to avoid the temptation to pocket or spend the money instead of putting it into the next one. This is not “extra money”; This is necessary to pay off your overall debt.
An income-based repayment plan is a way to lower your monthly payments on federal student loans. These federal student loan refinancing plans calculate what you’ll pay based on your family size as well as income, and include a Public Service Loan Forgiveness component.
Once you’ve reached the maximum payment threshold for any of these plans, if you don’t pay off your loan within the payment period – 20 to 25 years – your remaining debt will be forgiven. Student loan forgiveness is a big deal. However, the length of that loan is perhaps the biggest downside to this approach: you might be paying less, but you’ll still be in debt for up to a quarter of a century.
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Student loan refinancing is an option offered by private lenders that may be worth considering depending on terms and interest rates. Student loans generally offer relatively low interest rates, but you can refinance to a lower rate or reduce your payments by taking out a longer-term loan.
See if you can reduce your payments by extending them, or if you can get a lower interest rate on a new loan. If you have multiple student loans, refinancing can consolidate them into one payment. This is similar to debt consolidation, but the term generally refers to combining federal debt into a single new federal debt. Loan refinancing, on the other hand, is offered by credit unions, banks and private companies that specialize in student loans.
Managing student loans requires planning and prioritization. Paying off student loans can be difficult, but if you take stock of what types of loans you have and adopt a strategy that allows you to pay them off as quickly as possible, they won’t be such a burden on your personal capital. 🇧🇷
Finally, knowing your loan balance, interest rate, and the type of loan you took out can go a long way toward putting you back in control of your finances.
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Ana Gonzalez-Ribeiro, MBA, AFC® is a Certified Financial Consultant® and a bilingual personal finance writer and educator dedicated to helping populations in need of financial literacy and advice. Informational articles from her have appeared in various media outlets and websites, including the Huffington Post, Fidelity, Fox Business News, MSN and Yahoo Finance. He also founded the personal finance and motivational website www.AcetheJourney.com and Katherine B. Hauer translated CFP’s book Financial Advice for Blue Collar America into Spanish. Ana teaches personal finance courses in Spanish or English on behalf of the W!SE (Working In Support of Education) program, teaches workshops for non-profit organizations in New York.
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Disclaimer: Not providing financial advice. The content presented does not reflect the views of the Issuing Bank and is presented for general educational and informational purposes only. Consult a qualified professional for financial advice.
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