Getting a handle on your student loans and other debt can be intimidating. To start, consider a strategy that prioritizes your various types of debt, following the framework below. Then, familiarize yourself with the flexible financial products that can help you combine and pay off your debt, such as a personal line of credit.
A personal line of credit offers convenient access to funds that borrowers can use for a variety of purposes, including refinancing existing debt from multiple lenders into one convenient monthly payment. Use this personal line of credit calculator to find out if you can pay off student loan debt faster, or save more over time, by refinancing at a new low interest rate.
Paying off your debt without a strategy is like throwing spaghetti against a wall to see what sticks — a messy process of trial and error that probably won’t yield results.
Plus, if you have a mix of debt in addition to your student loans thanks to credit cards, mortgages and other loans, you might find it tricky to decide where to start.
However, prioritizing your debt so you know which debt to target first (and then which to target next) can be a game-changer. Your debt strategy can bring the light at the end of the tunnel into view and motivate you to keep working toward it.
Here’s a helpful guide for deciding when you should prioritize paying off your student loans first and when you should pay down other debt instead.
Note: The CARES Act, passed on March 27, 2020, suspends all payments for certain types of federal student loans until September 30, 2020. Interest will not accrue during this time period. The CARES Act does not apply to private student loans. For borrowers with private student loans, it may make sense to refinance now, or combine their student loans into one payment at a lower interest rate, to save more and get out of debt faster. Learn more here.
Four reasons you should pay down your student debt first
1. You’re facing high student loan rates
The debt avalanche strategy calls for a borrower to pay down their debt with the highest interest rate first. So if that’s your student loans, then that’s where you should begin. By paying down your most expensive debt, you’re putting your money where it can save you the most by paying less interest in the long run.
If you have multiple student loans, start by targeting the one with the highest interest rate. Then, when that student loan is paid off, you can roll your monthly payments on that debt (both the minimum and any extra payments) to the next student loan.
You also might want to explore refinancing your student loans. If you can qualify for a lower interest rate, refinancing can help you lower your monthly payments and save on interest.
2. Your student loan has a small balance
If you have a small balance on your student loan debt compared to the rest of your debt, consider following the debt snowball method and paying off your smaller debt first.
The debt snowball method helps you see results and get a win under your belt — fast. That can be the motivation you need to stick with your debt payoff plan. It also more quickly frees up the money you’re spending on your minimum payment to use for other goals. Take a look at your student debt as a whole and as individual loans. Figure out which student loan has the smallest balance and start from there.
3. You have private student loans
Private student loans can be a riskier form of debt than federal loans — and you should work to get rid of them sooner rather than later.
That’s because private student loans don’t offer the same repayment protections and options as federal student loans, such as income-driven repayment (IDR), deferment and forbearance. Plus, if you have a co-signer, how you manage your private student loans will affect the finances and credit of both you and your co-signer.
What’s more, private student loan default can be triggered more easily than federal student loan default. Federal student loans have set rules for default, and you get 270 days (or nine months) to avoid it. Private student loan lenders, on the other hand, have their own rules for when a loan is in default. Missing even one payment could lead to default.
4. You’re close to defaulting or declaring bankruptcy
If you’re in danger of student loan default or bankruptcy, paying off student loans could help you avoid some nasty consequences.
For example, defaulting on federal student loans can lead to wage garnishment much more quickly than lapsing on credit card payments. So if you’re struggling with federal student loan payments, make it a top priority to adjust or suspend payments through IDR or deferment. This will keep you out of default — and your servicer away from your paychecks.
In most cases, student loans are not dischargeable in bankruptcy. So if you’re considering this step, discuss your options with a bankruptcy lawyer. Depending on your other debt, your overall financial situation and the kind of bankruptcy you choose to file, you might need to continue making payments on your student debt.
Five reasons you should pay down other debt first
1. You’re following the debt snowball or avalanche method
If you’re following the debt avalanche or snowball method, you might target student loans first. But it’s possible these strategies could lead you to target other debt with higher interest rates or lower balances.
Personal loans and credit cards often carry higher rates than student loans, with credit card APRs ranging all the way up to 20 percent and higher. Plus, revolving debt, such as credit card debt, often has smaller balances that can be knocked out quickly.
The only way to know for sure where to start with the debt snowball or avalanche method is to list all your debt and loans in one place. Then, you can compare and sort by debt amount and interest rate to figure out whether to pay off student loans or other debt first.
2. You value federal loan protections
There aren’t many other types of debt that provide the borrower protections and repayment options federal student loans offer.
For instance, maybe you’re enrolled in an IDR or other non-standard payment plan for your federal student loans. If this flexibility to adjust payments is important to you, paying down other debt first before federal student loans might be your best option.
3. You hope to qualify for PSLF
Public Service Loan Forgiveness is a program slated to forgive federal student debt for more than 550,000 Americans. Any balance remaining after 10 years will be forgiven for PSLF-eligible borrowers.
The more you pay on this debt, the less will be left for the government to forgive. Focusing on other debt can make more sense if you’re counting on student loan forgiveness later on.
4. You want to improve your credit
Paying down your debt quickly can improve your credit.
However, you’ll see your credit score increase even faster if you pay down certain kinds of debt, such as credit cards and lines of credit. This debt affects your credit utilization ratio, which measures how much of your available credit you’re using.
Ultimately, higher balances on revolving debt will give you a higher utilization ratio — which can damage your credit. So if you have maxed-out credit cards, targeting that debt first can help you build credit faster.
5. You want to claim interest tax deductions
When you’re deciding which debt to prioritize, it can help to consider the potential tax benefits you can claim. Most consumer debt can’t be claimed as a tax write-off, but student debt and home mortgages are exceptions.
Both offer taxpayers the chance to deduct loan interest from their taxable income. This can offset some interest costs, making this debt less expensive to hold overall.
However, keep in mind that these benefits aren’t unlimited. As of 2020, you can claim only $2,500 a year in student loan interest, for example. Plus, for the 2019 tax year, a student loan tax deduction starts phasing out at $70,000 in modified adjusted gross income (MAGI) for an individual and at $140,000 in MAGI for a married couple filing jointly.
Estimate your student loan tax deduction and then include it in your total debt cost calculations to get the most accurate picture of which loans are costing you the most.
Start strategizing your way out of debt today
The hardest part of any race is the first step, and the most difficult debt to repay is the first dollar. Figuring out where to start is scary and requires you to take a hard look at your debt.
Choose a debt payoff strategy that makes the most sense for you and keeps you motivated — then, stick with it.
This article was updated in July 2020. It was written by Andrew Josuweit from Forbes and was legally licensed through the NewsCred publisher network.