Mixed Loan Repayment Strategy

There are several strategies to consider if you have both federal and private student loans. We at TISLA tend to be on the financially conservative side so take that into consideration as you go through these suggestions and the order of preference we’ve put them in. One thing to remember as you consider these options, is that no matter what, you are required to pay the minimum due on each loan. The other thing to remember is that no matter if you pay extra or not, payments are applied in the same way as far as what goes to interest and what goes to principal. This article on how payments are applied explains this concept.

Pay the Private Loans Off First

This suggestion is generally the right one for most borrowers with both private and federal student loans. If you are struggling to make both payments, using the repayment options available to you on you federal loans can help get the payment down enough so you can make the private loan payments. Remember, private loans generally have few, if any, lower payment options.

If you can afford both payments, it’s still not necessarily a bad idea to lower the payment on the federal loan if you can, and throw that extra money at the private loans to get them paid off as quickly as possible. There are a couple of benefits to this.

The Safety Net
If you get into a financial jam down the road, having the private loans paid off, or significantly reduced, will give you a better safety net. Federal loans can be put into deferment or forbearance in times of financial trouble, while private loans usually only offer limited forbearance, sometimes for a fee. If you’ve been making strong and on time payments on your private loans, you may also be in a better position to refinance those loans at a lower rate. Finally, remember that private loans usually don’t have the discharge and forgiveness options federal loans offer if something really terrible should happen.

Interest Rates
Private loans often have higher interest rates than federal loans do. Paying these loans off first can save you significant money in interest in the long run. Remember, the name of the game is to pay the least amount over time.

Pay the Highest Interest Rate Loans Off First

If you have reliable employment, and a good emergency fund in place, another strategy is to pay the higher interest rate loans off first. For some borrowers, this could still mean focusing on the private loans over the federal loans, but not always. If you aren’t sure what your interest rates are, you can find your federal loan rates on your loan holder’s web site or www.nslds.ed.gov. Your private loan rates can be seen on your bill or loan holder’s web site.

Pay the Lowest Balance Loans Off First

This is another option for those with reliable employment and a strong emergency fund. Some borrowers enjoy knocking loans off the list and gain some additional motivation from doing so. The “snowball” method consists of paying the lowest balance loans off first, then taking that monthly payment amount and putting it to the next loan until that’s paid off, and so on. This can give you faster satisfaction by seeing the loans paid off one by one and the speed in which that happens increases as you continue to pay each loan in full and increase the next loans payment.

Choosing which method you use will mostly be based on your financial situation, but you also need to consider your financial “personality.” If you know you aren’t someone that will consistently use excess funds towards your student loan repayment goals, setting up automatic payments for the extra amounts could be key in achieving your goal. If you are someone that needs a little more instant gratification than a ten year repayment plan, using the snowball method might be what you need to keep paying those loans off as aggressively as possible.