By Deborah Meyer, CFP®, CPA
You went to college and got the degree. Now it’s a matter of paying off that debt. The credit card mantra, “pay off your debt with the highest interest rate first,” doesn’t always apply to student loans…it can be much more complicated.
Different Types of Student Loans
There is a variety of loan options: government-sponsored subsidized or unsubsidized and private loans. Federal subsidized loans look at financial need of undergraduate students, and the government pays interest on this loan while you’re in school and up to six months afterwards. Federal unsubsidized loans are available to all undergraduate and graduate students regardless of financial need. Private loans are usually a last resort, after you’ve already borrowed from the government but still have an unmet need. Private loans typically have higher, variable interest rates compared to government loans.
Study the Minutiae Before Paying on Student Loans
When you are ready to make payments, dive deep into the student loan debt detail. Check to see if it is a government loan with a fixed interest rate, a private loan with a higher variable rate, or a combination. Look at when you originally incurred the debt, too. The date of the first disbursement impacts the interest rate on federal loans.
Debt Snowball vs. Avalanche
When it comes to paying off any debt, there are generally two available methods: the snowball or avalanche. Debt snowball entails paying off the debt with the lowest balances first (regardless of interest rate), while debt avalanche guides you to pay off the highest interest rate first.
Conceptually, debt snowball makes a lot of sense. When you’re working toward any financial goal, it is easier emotionally to celebrate the small wins. If you want to run a marathon, any trainer would advise you to stick to a regimented schedule that gradually increases the distance you’re running before race day. With credit card debt, pay off the $1,000 credit card balance first, then the $2,000 balance, and so on.
Financially, however, the debt avalanche method is most prudent. For example, you focus on the highest interest rate of 20% and work your way down to the 2% rate. (For related reading, see: Debt Avalanche vs. Debt Snowball: Which Is Best for You?)
Dave Ramsey made the debt snowball famous, stating, “What I have learned is that personal finance is 20% head knowledge and 80% behavior.” If you are motivated to pay off the debt no matter what, the avalanche method makes sense. But if you’re honest and know you need an accountability partner, get one. That accountability partner may be a friend also trying to pay down debt, a spouse or an outside financial advisor. He or she is there to keep your emotions in check when the debt avalanche method seems too difficult.
Student Loan Consolidation
Too many loans to track? Consider consolidation if you want to make a single monthly payment rather than multiple payments. However, be careful of the longer repayment term—you’ll accrue more interest over the life of the loan if you fail to make extra principal payments.
Heather Jarvis is a student loan expert with a plethora of resources on her website. I had the pleasure of listening to her at the XY Planning Network conference in 2016. The Tools section of her website includes links to the Public Service Loan Forgiveness Program and income-driven repayment plans for federal student loans.
(For more from this author, see: Take a Smart Approach to Paying for College.)
This article was originally published on Investopedia.