Getting A Loan To Pay Off Student Loans – If you have taken out more than one type of student loan to finance your studies and one of these loans is a private loan, it is a good idea to start paying off that loan first. Loans financed by private lenders, rather than the federal government, do not offer the same protections as federal loans. They also typically have higher interest rates.[1]
This article will help you understand the differences between the types of student loans and which ones to tackle first when paying off student loans. It’s worth remembering that there are many ways borrowers can go about paying off student loan debt, and there is no one-size-fits-all answer.
Getting A Loan To Pay Off Student Loans
Here are some factors and options to consider when deciding which approach to take to manage your student loans.
Should I Use A Personal Loan To Pay Off Student Loan Debt?
To understand which student loan to pay off first, it is 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 payment on all of your loans. That’s because missing payments can seriously affect your credit.
If you have a private student loan, you are dealing with a private lender who bases your loan on your credit score. Personal loans may require a cosigner and may have higher interest rates and less flexible repayment plans than federal loans.
Private student loans can have fixed or variable interest rates, unlike federal loans, which are usually fixed-rate packages. As a result, personal loan rates may fluctuate to reflect prevailing rates as dictated by market conditions and reflect the underlying index.[2]
What Student Loan Forgiveness Means For You
The main difference between subsidized and unsubsidized loans is when interest starts accruing. With unsubsidized loans, you are responsible for the interest from the beginning.
With subsidized loans, the Ministry of Education pays interest while you are enrolled in university. You usually don’t have to start repaying your subsidized loan and its interest until six months after you stop taking classes (whether you graduate or not). The Ministry of Education will continue to pay interest for these six months.[3]
A personal student loan is similar to any other type of loan you take out outside of your studies.[4] There are no government protections, such as deferment and forbearance, or income-based repayment, that you get with a federal student loan. Some private loans require you to start making payments while you’re still in school—something federal student loans do not.[1]
It is a good idea to take private loans with higher interest rates off the table first. The less you pay in interest, the better. Because of this, paying more than the minimum payment can benefit you and pay off the principal faster, thereby lowering the interest you pay.[5]
A Breakdown Of How I Paid Off $87,000 Worth Of Student Loans In 2.5 Years
Since interest accrues faster on unsubsidized loans than on subsidized loans, it is a good idea to pay them off first.
If you’re thinking about refinancing or consolidating loans, be sure to run the numbers. Federal student loans tend to offer lower interest rates than private loans and rates that are well below some personal loans.[1] For example, federal student loans disbursed between July 1, 2021 and July 1, 2022 have a fixed interest rate of 3.73%.[6] Compare that to the average APR for personal loans in 2021, which ranged from 9.30% to 22.16%[7]
Paying off a federal student loan with money from a personal loan will likely raise the interest rate, and you’ll also lose access to some of the benefits you get from a federal loan, as mentioned above.
This class of federal loans is subsidized because the federal government—through taxpayers—picks up the tab for the interest that accrues while you’re in school. This type of loan is only available to undergraduate students who have financial need, so it may not apply to you. If you’ve taken out this type of loan, it’s the last thing you need to deal with when it’s time to pay.
Should I Save For Emergencies Or Pay Down My Student Loans?
Once you figure out which student loan to pay off first, you can determine the best method to do so. Here are four options to consider:
With the debt avalanche method, you focus on the amount of interest rather than the loan amount as in the snowball method. You pay off the loan with the highest interest rate first. The advantage of this method is that you spend less money on interest by paying off a high-interest loan before it gets worse. As a result, you’ll lower your overall payments and save money—perhaps a significant amount.
The downside to this method lies in the psychology behind it compared to the snowball method. You won’t be able to see progress nearly as quickly, so if you’re having trouble staying motivated to pay off your debt, the snowball approach is probably a better option.
With the debt snowball method, you prioritize your debts from the smallest balance to the largest, regardless of the interest you pay. Then pay as much as you can to pay off the first (smallest) debt on your list while making minimum payments on the others. This is important because defaulting on your student loan will show up on your credit report and affect your credit score. Autopay can help you pay on time and get you closer to paying off your debt.
Paid Off My Student Loans Today!
Once you pay off the first debt, move on to the next. You can now take the money you would have paid from the first loan and apply it to the second, plus the minimum you paid. That’s why it’s called the snowball effect. The more loans you pay off, the more money you have to spend on the minimum payment for the next loan, etc.
It is important to be focused while using this method and avoid the temptation to launder or use any of the money once a loan has been repaid, instead of putting it towards the next one. It is not “extra money”; it is necessary to pay off your total debt.
Income-based repayment plans are a way to lower your monthly federal student loan payments. These federal student loan refinancing plans calculate what you’ll pay based on your family size and income and factor in public loan forgiveness.
Once you’ve reached the maximum payment cap for any of these plans, the rest of your loan will be forgiven if you haven’t paid off your loan by the end of the repayment period – 20 to 25 years. Student loan forgiveness is a big deal. However, the length of this loan period is perhaps the biggest disadvantage of this approach: You may pay less, but you will still be in debt for up to a quarter of a century.
How To Pay Off Your Student Loans Faster
Student loan refinancing is an option offered by private lenders that may be worth looking into, depending on terms and interest rates. Student loans generally offer relatively low interest rates, but you may be able to refinance to a lower interest rate or lower your payments by taking out a longer term loan.
See if you can lower your payments by stretching them out or if you can get a lower interest rate on a new loan. If you have more than one student loan, refinancing can combine them all into one payment. This is similar to loan consolidation, but that term usually refers to combining federal loans into a new single federal loan. However, loan refinancing is available from credit unions, banks and private companies that specialize in student loans.[9]
Dealing with student debt requires planning and prioritization. Student loan repayments can be difficult, but if you take stock of the types of loans you have and adopt a strategy that allows you to repay them as quickly as possible, they don’t have to be such a burden on your personal finances.
Finally, knowing your credit status, interest rates, and the type of loans you’ve taken out can go a long way in getting you back in control of your finances.
Tips To Paying Off Student Loans
Ana Gonzalez-Ribeiro, MBA, AFC® is a Certified Financial Advisor® and bilingual personal finance author and educator dedicated to helping residents in need of financial knowledge and advice. Her insightful articles have appeared in various news outlets and websites, including the Huffington Post, Fidelity, Fox Business News, MSN, and Yahoo Finance. She also founded the personal finance and motivational website www.AcetheJourney.com and translated into Spanish the book Financial Advice for Blue Collar America by Kathryn B. Hauer, CFP. Ana teaches personal finance courses in Spanish or English on behalf of the Working In Support of Education (W!SE) program and has taught courses for nonprofit organizations in NYC.
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