Practical Tips for Paying Off Your Student Loans

A 2022 study from the Federal Reserve found that 20% 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. That’s a lot of money, and the debt burden has made it difficult for young adults to buy their first home and start saving for retirement. Recent relief efforts have reduced that burden, but as borrowers now await a decision from the Supreme Court regarding continued debt relief, it can be difficult to understand how and when to pay loans back. Here’s what you need to know.

When Are Student Loans Due?

All eligible loans had their payments automatically paused and interest rates set to 0% on March 13, 2020. For any loan payments made during the 0% interest period, the full amount of your payments will be applied to your principal balance once you’ve paid all the interest that accrued prior to March 13, 2020 and any fees (for defaulted loans).

According to the U.S. Department of Education, the student loan payment pause is extended until the Department is permitted to implement the debt relief program or the Supreme Court litigation is resolved. 

Once a resolution is reached, payments for student loans will resume 60 days later. If the student loan forgiveness program has not been implemented and the litigation has not been resolved by June 30, 2023, payments will resume 60 days after that. Both the Department and your loan servicer will contact you ahead of time to remind you when you need to start making payments again, so make sure your contact information is up to date in your profile on your loan servicer’s website and in your StudentAid.gov profile.

Which Student Loans Should I Pay Off First?

When student loan payments do resume, you’ll want to have a repayment plan in place for paying down the debt. There are several schools of thought when it comes to paying off student loans. Should you pay off subsidized or unsubsidized loans first? What about higher interest versus higher balance? There’s no one-size-fits-all answer to paying off student loans, but these strategies can help you come up with a game plan that works for you.

Strategy 1: Start With Your Smallest Student Loan

One strategy for paying off student loans is to knock out your smallest loan first. This method works well for graduates who are feeling overwhelmed and discouraged by the number of loans they have. Knocking out the loan with the smallest balance allows you to feel like you are making progress toward your overall goal. 

For example, if you can pay off a $500 loan and then a $2,000 loan, you’ll feel much more confident about tackling your $10,000 loan. Many refer to this technique as “the snowball method” because the process allows you to gain momentum like a snowball rolling down a hill. As you pay off more of your loans, you’ll become more encouraged as you begin to see the light at the end of the tunnel.

Strategy 2: Start With Your Highest Interest Rate Loan

Understanding and comparing interest rates is important to understanding your full student loan picture. 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. Second, because you’re paying less interest, you’re able to allocate these funds toward paying off another loan or put them toward long-term savings.

Strategy 3: Start With Your Unsubsidized Loans

A subsidized loan doesn’t start accruing interest until you’ve graduated and you’re out of deferment. Unsubsidized loans, on the other hand, start gathering interest as soon as you borrow them. It makes sense, then, to work on paying off these loans first.

In other words, the type of loan doesn’t matter once the deferment period ends, but if you’re a current student who is getting an early start on loan repayment, you’ll want to start paying your unsubsidized loans as soon as possible so you can save yourself from paying large sums in interest down the road.

Strategy 4: Don’t Start With Student Loans

It may not be the answer you were expecting, but sometimes it’s best to make minimum payments on all of your student loans so you can focus on other outstanding debts with higher interest rates or larger amounts (like credit cards or medical bills).

Strategy 5: Student Loan Consolidation

In addition to the ideas above, you may want to consider student loan consolidation. In this case, you’ll end up with a single loan instead of a bunch of individual ones. This advice, however, comes with a few caveats. First, you should only consolidate your loans if it will end up lowering your overall interest rate. For example, if you have multiple private student loans with interest rates above 10 percent, you may want to explore consolidation options. Second, some consolidation programs lower your interest rates and monthly payment, but they extend the payback period. If you’re not careful, you could end up paying more. Third, consolidation doesn’t eliminate debt, it just helps you lower your interest rate, so you’ll still need to focus on student loan repayment.

The best strategy for paying off student loans depends on your situation. Using these tips, you can make progress and eliminate debt.

You Did It! What’s Next?

Once you’re free of student loans, you’ll have more money to achieve your financial goals, like purchasing a home, saving for your children’s education and investing in retirement. No matter what stage of life you are in, your Farm Bureau agent is here to help with insurance and investment tools to create a sound future.