One of the most daunting feelings that you can have after graduating from college may occur when logging into your student loan account and seeing multiple balances. Which one do you pay off first? What if you do the wrong thing? Why doesn't the loan servicer make this less confusing?
Fortunately, the process of paying down multiple student loans isn't that hard once you pick a strategy and get started. All it takes is a little bit of organization, and then a quick self-evaluation to see what would likely keep you the most motivated on your debt-payoff journey.
There are a lot of factors and variables that you might run into, but we've filtered them down to give you some clear strategies for getting rid of your student loans faster.
Here are five simple steps to choose which loans to pay off first:
1. Find out what type of loans you have
Not sure what kind of loans you actually have? Don't worry—you definitely aren't alone. The reality is that after 4–6 (or more) years of finding ways to fund your education, some of the details about the loans that you're holding might be a little fuzzy when it comes time to start paying them off.
Before you attempt to do anything with your loans, take some time to create a list that includes the amount, type and outstanding balance of each loan.
Just like anything else in personal finance, organization is key. Making a list will also help to battle the overwhelming feeling that you get when you think about all of your loans. Personally, I had six different student loans, and being able to refer to a list was a giant help as I was paying them off.
2. Go after the private loans before the federal loans
If you have a mix of private and federal student loans, you should prioritize the private loans first in most cases unless the balances and interest rates are abnormally low. The reasoning is pretty simple—private loans tend to have far fewer protections for the borrower than do federal student loans.
If you were to fall on hard times, many private loans don't offer the safety net of income-based repayment or deferred payment options that come with federal student loans.
While companies that specialize in student loan refinancing do have some benefits that are competitive with federal student loan benefits, the reality is that your loans are probably from a bank or lender that didn't offer them at the time the loan was borrowed.
3. Find out if your interest rates are fixed or variable
This is an important distinction: Variable loans have interest rates that rise and fall with market rates. That means that you may be paying much more in interest on your loans if rates were to rise quickly.
Fixed-rate student loans have interest rates that stay the same throughout the life of the loan, which means no expensive surprises for you regardless of market interest rates rising.
The last thing you want when creating a plan to pay down debt is unforeseen circumstances. Eliminating your variable rate loans first will give you a clearer (and less stressful) path toward debt freedom.
4. Choose the avalanche or snowball payoff method
There has been a debate raging in the personal finance world for years over the best way to pay off multiple debt balances. The two commonly accepted approaches are the debt avalanche and the debt snowball.
Here's how they work:
With this method, you focus on paying off the loan amounts by lowest to highest interest rate.
With the snowball method, you pay off the loan with the smallest balance first and then move on to the next highest balance. Interest rates are essentially disregarded here.
The snowball is particularly popular with personal finance expert Dave Ramsey and his audience. The idea is that you get wins faster by paying off the smaller amount of debt and stay motivated throughout the process.
Both strategies work well and follow the same line of thinking that you can increase your debt-crushing ability quickly by paying off a loan and applying the amount you would have been paying in minimum payments to the next loan balance.
5. Attack each loan by highest to lowest interest rate
Personally, I prefer the avalanche method for paying down debt. While the snowball method is certainly a good one and has worked for a lot of borrowers, it's also less efficient and costs the borrower more money in the form of paid interest.
If you feel that more frequent victories will keep you motivated, by all means, do the snowball method.
However, if you're able to stay self-motivated for the long haul, the avalanche method could end up saving you thousands of dollars!
The process is simple. All you need to do is list your loans by the highest interest rate to the lowest, regardless of the actual balance of the loans.
Apply your extra payments to the first loan. Once you have closed that one out, combine your extra payment amount with the additional money that you just freed up from the first loan. Apply those combined funds to the next loan on the list, and repeat as necessary until all of your loans are gone.
Again—you won't see quick wins this way. But you will save a ton of money, which to me is worth the delayed gratification.
No matter which strategy you choose, the key is to stay committed
Both the avalanche and debt snowball methods work well. You should absolutely feel good about choosing either strategy. The most important factor is making sure that you are setting yourself up for success by being honest with yourself and choosing the strategy that will take you where you want to go.
The easiest way to stay motivated is to find communities of people that are going on the same journey as you. After talking to thousands and thousands of student loan borrowers, I can tell you that someone has probably had a similar situation to you and has come out on the other side in a better financial position. If you're looking for a quality group to join that has thousands of student loan borrowers going through the same situations, take a look at the free Millennial Money Man Facebook community here.
Pick a strategy, surround yourself with people who are going on the same type of journey and don't give up!
[Note: APA members have free access to IonTuition, a web-based service that helps you manage student loan repayment. Start using IonTuition]
—Bobby Hoyt is a former high school teacher who paid off $40,000 of student loan debt in a year and a half. He now runs the personal finance site MillennialMoneyMan.com full time, and has been seen on CNBC, Forbes, Business Insider, Reuters, Marketwatch and many other major websites and publications.
The opinions and advice expressed in this article are those of the author and do not necessarily reflect those held by the American Psychology Association (APA).