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Which Student Loan Should You Pay First?

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The financial camps are divided between paying off your smallest first vs. your highest interest student loan. So who’s right?

Finance people can agree on a few things. Some debts like payday loans and IRS back taxes are worse than others and ideally, you should get rid of all debt that keeps you from having a positive net worth.

But how do you decide what goes first? This is something I stressed over when we started out. I had a large high-interest student and a small low-interest car loan while my husband had a moderate student loan with moderate interest. A total conundrum.

Also read: Is Being Debt Free Worth it?

So if you’re struggling to figure out where to start here’s a look at my theoretical friend and her theoretical $60,000 of student loan debt. She took out federal and private loans and doesn’t have a career that qualifies her for any student loan forgiveness. (Or this could be a couple’s student loans combined, however you want to look at it.)

Her theoretical student loans are:

a. $20,000 @ 4% interest with minimum payment of $150 p/m
b. $40,000 @ 6.5% interest with minimum payment of $300 p/m

I wanted to keep monthly payments as similar as possible so I adjusted the number of months for payment of the first loan accordingly keeping the total repayment for both at 36 months.

Pay off the Smallest Loan First

a. $1574.60 per month for 13 months. Total interest paid= $469.77
+$300 p/m for the minimum payment of other loan= $1874.60 total monthly payment for first 13 months.

b. After 13 months of minimum payments, the balance is now $38,879.74 with $2,780.72 of interest paid during this time.
The new monthly payment becomes $1,802.44 for 23 months and we end with $2,577.18 more in interest paid.

Total interest paid over 36 months: $5,827.67

Pay off the Highest Interest Loan First

b. $1653.49 per month for 26 months. Total interest paid= $1,803.49
+$150 p/m for the minimum payment of other loan= $1,803.49 total monthly payment for first 26 months.

a. After 26 months of minimum payments, the balance is now $17,763.60 with $1,641.55 of interest paid during this time.
The new monthly payment becomes $1,809.03 for 10 months and we end with $327.28 more in interest paid.

Total interest paid over 36 months: $4,959.65

Difference= $868.02 saved by tackling higher interest loan first.

To compare, I calculated paying both at the same time.
Monthly Payment= $1,816.44 for 36 months
Total Interest Paid= $5,391.83 Less than option 1, more than option 2

I then further calculated to see what the difference would be if my friend paid off her loans in 5 or 10 years:

5 years= $9,058.59 in interest paid (There’s that car she just financed)

10 years= $18,801.86 in interest paid (There’s that down payment on a house she said she couldn’t afford!)

The moral of the story is that if $800 keeps you up at night you should pay off higher interest loans first, especially if they’re big behemoths.

But if $18,000 keeps you up at night you need to get out of bed and start hustling.

Paying $1800 a month on student loans looks like a big number but maybe your loan is smaller, maybe you have the means to move in with more roommates or cut the cable and eating out.

Also Read: How to Make Paying off Debt not Suck

If you have smaller loans within your student loan pay those off in order of smallest to largest or break it down into milestones. Rewarding yourself with attainable benchmarks will help keep you motivated.

Whatever it is it’s time to start looking into the future and think about what you want to be doing with your money instead of giving it to the bank. Because the one thing everyone in the world can agree on is that it’s not fun to give away your money to banks when you don’t have to.

Choosing which debt to pay off first was so stressful! This article really put it into perspective.

This Post Has 22 Comments

  1. Focusing on the larger amount first can be a little demoralizing from a milestone perspective, but the math doesn’t lie!

    In my case I have a bunch of smaller loans with varying rates. This will allow me to pay them off small>big so that I can feel a little psychological momentum during the process. I’m not sure I want to face the math showing me how much extra I’m paying…

    Thanks for sharing!

    1. We did the same thing within my big loan. There’s no better feeling than getting that “loan paid in full” email!

  2. I was fortunate enough when I began my debt payback process in that my highest interest loans were also my smallest balance loans. In my opinion, do whatever will motivate you to pay off your loans fast! In the end, I ended up refinancing my loans into one big loan. But since I no longer had the motivation of paying off each loan at a time (since I had morphed it all into one big loan), I motivated myself by setting goalposts of $10,000 at a time. Each time I felt like I was taking action as my student loans decreased to the next level of $10,000.

    1. I agree! Setting milestones and having little rewards are the key to not giving up in the middle.

  4. This post is soo helpful. I’m definitely off to reevaluate my strategy after reading this!

  8. Jen – Thanks for the great article. It’s helpful to see two examples side by side. I normally side on the order by balance, and not order by interest rate; however, I do believe a hybrid method is great. If you have some loans that are obscenely high, then it makes sense to get rid of those first. If you don’t have any of those, then getting early wins by paying off the smaller loans first really help people to find the motivation.

    When my wife and I were in our planning mode, we create a Debt Destruction Plan, where we did order by balance (because we didn’t have any interest rates that we more than 10%). Regardless of the way we ordered our debts, I’m just glad that we created our plan. We got organized…we headed in a specific direction…and that made all the difference for us. You can check out our Debt Destruction Plan here: http://www.poweroverlife.com/create-debt-destruction-plan/

    1. That’s awesome. The plan is definitely the key regardless of what loan is being paid off. Thanks for reading Jacob!

  9. Thanks for this article Jen. I think a lot of advice on which loan to pay off first is wrong. I also think it doesn’t always make sense to pay off your student loans (or mortgage) if you can get a higher return on your money somewhere else. For example, my wife has loans that we refinanced at a 2.72% rate and while we could pay it off, we are getting a 7% return on our money in the stock market and 13% return on our real estate investments. In this case I would rather just keep paying off the student loans and use our cash for higher ROI investments. It doesn’t always make sense to pay off student loans when you can get a higher ROI. I often chat with people who are curious whether they should pay off their student loans or save to buy a house – in a lot of cases the house wins, but of course everyone’s situation is different. Great post – I love the simple numbers based rationality.

    1. Wow. 2.27 is insane, I thought 4 and 6.5 were conservative. Every situation is different but I’m in the mindset that if you have interest that’s higher than what you can get on a mortgage you should hit that debt first, and I find that’s virtually everybody I talk to. Thanks for the kind words!

  13. Brilliant. It’s a matter of doing the math and then deciding what the plan is. There are too many people who insist “low balance first” as if it were gospel. Even when I suggest they run the numbers using a spreadsheet or on line calculator, they dig their heals in. One blogger insisted on paying multiple $10K zero rate loans before the $20K 18% credit card, which of course is nonsense. Once you know the numbers, at least you know the cost or benefit of the path you took.

    1. Thanks Joe! My husband and I were at odds when deciding which loan to pay off first. I’m glad we chose to pay the higher interest one first but I can definitely see why people chose the smaller loans first. 18% is a crazy interest rate though. It would be hard to let that one sit around.

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