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Student Loans, Credit Cards, Auto Loans: Which Debt Should You Pay Off First?

Aug 29, 2011 Jennifer Williamson, Distance Columnist | 5 Comments

Many students and recent grads have more than one type of loan to deal with. And sometimes it can be tough to decide how to pay off all that debt. Should you make the minimum payments on everything, or try to pay certain loans off before others? The strategy depends on your loan situation—but in general, it’s always better to target certain loans for aggressive repayment. This strategy will leave you paying less interest in the long run. Here’s how to pay off your loans while saving as much money on interest as possible.

Compare interest rates

Which loan has the highest interest rate? Which one has the highest fees? Which one is costing you the most to keep? Assess the interest rates on all your loans and pick the highest-interest loan to start paying first.

Target your payments toward one loan.

When paying off several loans at once, it’s never a good idea to spread your money evenly among them. If you have extra money,
focus it on your highest-interest loan first. Target that loan
aggressively while paying the minimum on your other loans,
and you’ll pay less interest in the long run.

Woman Holding Bills

It’s rarely easy to pay off debt—especially if you’re struggling under student loan, credit card, and other types of debt.



Once the highest-rate loan is gone, tackle the next-highest

Re-evaluate and pick the next-highest cost loan to target next.

Re-evaluate once a month

Some of your student loans and other loans will have variable interest rates. These can go up at any moment—some to very high rates. It could be that after a month or two, your loan with the highest interest rate will change—and you’ll have to re-think your loan targeting strategy.

Things to Consider

What are the fees on your loans?

Some student loans have monthly or regular fees that can boost the overall cost of the loan dramatically, even if the interest rate is lower. Evaluate how much you’re paying in fees, which fees occur monthly as a matter of course or are incurred as a penalty, and incorporate that into your assessment of which loan is the costliest overall.

Are there penalties for paying early?

Some loans—particularly private student loans—have built-in penalties for paying off the loan early. If you have a loan like this, figure out how much the penalty is—and whether it’s still cheaper to pay the penalty than to pay the interest rate over the full term of the loan. In some cases, it may still be to your benefit to pay the loan off early.

Are your student loans about equal to your credit card debt?

If there’s no significant financial difference between the cost of your student loans and a credit card or auto loan, consider other factors. With student loans, it’s often possible to get a deferment if you run into trouble. With credit card debt, that’s not possible. In most cases, if your interest rates are the same, it may be better to pay off non-student-loan debt first because repayment terms on these loans can be a bit harsher.

It’s rarely easy to pay off debt—especially if you’re struggling under student loan, credit card, and other types of debt. Make a financially sound decision—and pay off the costliest loans first, taking into account both fees and interests. Monitor your loans every month to catch changes in variable interest rates, and keep paying the minimum payments on your lesser loans while you target the most high-interest loan. If you do, you’ll have your loans off your back in a relatively short amount of time—and pay less interest over time.

Drowning in Debt: US students helpless to pay off education -




Mr. Rex Over a year ago

I never thought about this one "What are the fees on your loans?" Some good pointers. Thanks.

James from Selloutyoursoul dot com, a career guide for lost humanities students.

Mr. Perry Over a year ago

Student loans may also stay with you even after filing for bankruptcy. Just something to consider.

Ben Pfeiffer Over a year ago

Does it matter what type of student loan? Or do all student loans stay with you after bankruptcy? Some government student loans are need based (subsidized) and others are NOT-need based (unsubsidized), and then of course you have private loans. I assume they all stay with you after bankruptcy, so you should start paying those down as soon as you can?

staci mcnulty Over a year ago

Student loans have gotten to be as much a scam as any other type of *bad* debt. Everyone thinks student loan debt is good but if we all stop to think about it, the amount students are taking out in no way compares to the amount they will be able to earn in a job.

Stephanie Watson Over a year ago

Nice post shared. Thank for this great tips, I think it is very important to

implement those.

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