Which of your student loans should you pay off first?

A student loan is in theory designed to assist students pay for tertiary level education, such as university tuition, books and living expenses. For any it has become the sacred solution to being able to achieve a bright and successful career. However after all the hard work and dedication to scholarly endeavors the reality is a student ends up leaving college burdened by debt with no substantial means of repaying debt due to circumstances that are outside of their control. They must now begin the long and arduous task of figuring out which student loans should be paid off first. Here are a few tips on making that tough decision.

Identify the type of student loan that you have

Deciding which loans to repay first depends on the nature of your student loan. You might have either a federal loan or a private student loan from a bank. Each of these student loans carries significantly different terms, interest rates and repayment options.

Student Loan for College

Student Loan for College

Federal Loan vs. Private Student Loan

Federal loans are student loans that are subsidized by the government to assist individuals in obtaining a tertiary level education. A private student loan, however is a loan granted by a bank or other private financial institution to individuals or families seeking to pay for a college education or educational endeavor. Private student loans are generally more expensive than federal student loans. The student loans offered by banks lack the flexible repayment options offered by federal loans. For federal student loans you can possibly reduce your payments with an extended, graduated or income based repayment plan. These options allow you to make the best decision regarding your repayment plan. You can choose an option that best suits your specific needs. Banks and other financial institutions determine the rates, loan limits, loan terms and conditions of private loans. Banks usually carry a higher and variable interest rate. Banks lack the more affordable fixed rate and flexible repayment options that federal loans offer. It is important to identify the type of student loan and then you better decide which to pay off first.


Graduated Plan

The graduated plan allows your payments to start low and gradually increase over a two year period. This is a good option for graduates who expect their income to increase rapidly as they gain experience in their chosen field.


Extended Plan

Individuals can stretch their repayment period for up to 25 years with the extended plan. This is a good option if individuals have debt over 30k. However it is important to note that overall costs will be higher due to increased interest rates.


Income Sensitive Plan

Depending on your level of annual income, household size and loan balance you can opt for an income sensitive or income contingent plan. If you are uncertain about your future income or your earning potential is unstable this option might be best for you.

Many persons find themselves in a situation where they take a loan for each school semester to finance tuition, books and living expenses as they are incurred throughout their college career. As a rule of thumb you should probably repay the first or initial loan that you received to finance your education as soon as possible. It is important to remember that at some banks interest accrues from the first day that the loan was discharged, although repayment can be delayed till after you have finished your college career. This means that interest is compounded to the principal and continues to do so throughout the life of your loan increasing your debt day by day. When deciding which student loan to repay first focus on the type of loan that was issued, the terms and repayment agreement and the length of time you have had that particular loan. This will help you to make the best financial decision in repaying your student loan.

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