Yes, it is typically recommended to pay off your highest student loan first as it will save you the most money on interest in the long run.
The best strategy for paying off student loans is a common concern for many graduates. Should you pay off the highest balance loan first, or focus on the one with the highest interest rate? Financial experts suggest that it is best to start with the highest interest rate loan as it will lead to the most savings over time.
According to Kim Clark, assistant professor of personal finance at Utah State University, “If you pay off the high-interest loan first, the total amount you owe in interest payments will be lower.” This is because the higher the interest rate, the more you will pay in the long run.
Here are some interesting facts to consider when developing your student loan repayment plan:
- The average student loan balance for a 2019 college graduate was $29,900.
- The current average interest rate for federal student loans is 2.75% for undergraduate and 4.3% for graduate students.
- Private student loans generally have higher interest rates compared to federal loans.
- Making additional payments towards your student loans can save you money on interest in the long run.
- According to a recent survey, 55% of respondents said they regretted taking out student loans.
To help visualize the impact of paying off your highest interest loans first, here is an example using hypothetical loan amounts and interest rates:
Loan Balance Interest Rate Monthly Payment
Loan A $5,000 5% $150
Loan B $10,000 7% $230
Loan C $15,000 9% $288
In this example, if you were to pay off Loan B first, it would save you the most money in interest over time despite its higher balance. Here is a breakdown of the total interest paid for each loan, assuming you made minimum payments on the other loans:
Loan A: $1,206.78
Loan B: $3,652.19
Loan C: $12,636.26
As you can see, even though Loan C has the highest balance, the highest interest rate on Loan B makes it the priority for repayment.
To simplify your student loan repayment plan, consider creating a table like the one above to help you prioritize which loans to focus on first. Remember, while paying off loans may be daunting, taking action and developing a strategy can lead to big savings in the long run.
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3 Strategies to Pay off Your Student Loans
- 1. Pay off Private Loans First Best for: Borrowers with variable-rate private loans Private loans typically carry higher risks than federal debt.
Which student loan you pay off first is up to you, but the best choice is usually the one with the highest rate or the fewest consumer protections. The best strategy for you can also vary based on the type of student loans you have and how much student loan debt you have in total.
- Prioritize high-interest loans. If you have multiple loans and you do not need to consolidate or refinance them into one payment, focus on the highest-interest loan first. These will be the largest payments.
- Refinance or consolidate.
As you decide which student loan to pay off first, consider taking a look at the types of loans you have. If you have private loans, you might consider starting with that debt. On the other hand, some federal student loans have higher interest rates, so you might feel more comfortable tackling those first.
Video response to “Should I pay off my highest student loan first?”
A 20-year-old caller named Jasmine seeks advice on whether to pay off her $15,000 credit card debt or $12,000 student loan debt first. Host Dave Ramsey advises her to create a debt snowball by listing out the individual balances from smallest to largest, ignoring interest rates and making the minimum payments on student loans until the government makes a decision on repayment. Ramsey encourages her to be creative, keep track of progress, and prioritize paying off both debts since she has an income of $50k and can eliminate them within a year. He also sends her a Financial Peace University (FPU) package that includes the Every Dollar app to help manage finances and budget effectively.
You will most likely be interested in these things as well
Is it better to pay off higher interest student loans first?
As an answer to this: Which student loans should you pay first: subsidized or unsubsidized? It’s a good idea to start paying back unsubsidized student loans first, since you’re more likely to have a higher balance that accrues interest much faster. Once your grace period is over, even subsidized loans will start accruing interest.
Should you pay your largest loan first and why?
The response is: Option 1: Pay off the highest-interest debt first
Key advantages: Allows you to save money and redirect funds to other financial goals. Key drawbacks: If your largest debt also has the highest interest rate, it could take a while to pay it down.
Hereof, Can I choose which student loans to pay off first?
The answer is: Which student loan you pay off first is up to you, but the best choice is usually the one with the highest rate or the fewest consumer protections. The best strategy for you can also vary based on the type of student loans you have and how much student loan debt you have in total.
Also asked, Should you prioritize paying off student loans? Response: A general rule of thumb is to invest instead of aggressively pay off your student loans if the average return on investment is higher than your student loan interest rates. A conservative but plausible return on investments is 6% per year.
Regarding this, Should you pay off student loans first?
As a response to this: If that sounds like you, use the debt snowball method. You’ll pay off the smallest student loan first, rather than the one with the highest interest rate. You can also opt for a combination method. Rank your loans by interest rate, and if several have the same or similar rates, pay off the smallest one first.
Should I pay off the highest interest rate first? As an answer to this: What Debt Do You Pay Off First? It’s a common question when paying off debt— Should I pay the debt with the highest interest rate first since it costs me the most money? Short answer: No. But we’ll explain. It’s best to start with the smallest balance. Here’s why.
Similarly, Should you pay more interest on student loans? More interest will accrue on those loans if you do that, so calculate your total costs. Always pay at least the minimum on all your student loans. Once you’ve decided which type of loan to attack first, choose a strategy.
Furthermore, How do you make money on a student loan? The answer is: Here is a list of our partners and here’s how we make money. Pay off the student loan with the highest interest rate first. That will save you the most money over time. But if getting rid of small balances one by one motivates you more, go that route regardless of interest rate.
Should you pay off student loans first? In reply to that: If that sounds like you, use the debt snowball method. You’ll pay off the smallest student loan first, rather than the one with the highest interest rate. You can also opt for a combination method. Rank your loans by interest rate, and if several have the same or similar rates, pay off the smallest one first.
Should you pay off your highest interest rate loan first? If you work to pay off the loan with the highest interest rate first, you won’t immediately reduce the number of loans you have, but you may end up benefiting anyway. There are two major benefits to starting with your highest interest rate loan. First, you pay less interest over time, so it saves you money in the long run.
Should you pay more interest on student loans? More interest will accrue on those loans if you do that, so calculate your total costs. Always pay at least the minimum on all your student loans. Once you’ve decided which type of loan to attack first, choose a strategy.
How much do you owe on student loans? The response is: A 2018 study from the Federal Reserve found that 22% of adults who have borrowed money to pay for education expenses still owe money on their loans, and the average student loan debt is between $20,000 and $24,999.