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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.

<img data-attachment-id="1309" data-permalink="https://www.modernfrugality.com/smallest-amount-or-highest-interest-student-loan/which-loan-first/" data-orig-file="https://i1.wp.com/www.modernfrugality.com/wp-content/uploads/2016/10/Which-Loan-First-e1501605428219.png?fit=400%2C693&ssl=1" data-orig-size="400,693" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="Which debt should I pay off first?" data-image-description="

Which debt should I pay off first?

” data-medium-file=”https://i1.wp.com/www.modernfrugality.com/wp-content/uploads/2016/10/Which-Loan-First-e1501605428219.png?fit=173%2C300&ssl=1″ data-large-file=”https://i1.wp.com/www.modernfrugality.com/wp-content/uploads/2016/10/Which-Loan-First-e1501605428219.png?fit=346%2C600&ssl=1″ loading=”lazy” data-pin-description=”If you are in the midst of paying off a ton of student loans, read this. All of the inoformation on the debt snowball and the debt avalanche so you can decide which way works for you! #debtpayofftips #debtsnowballtips #debtavalanchetips #moneytipsformillennials” data-pin-title=”Should you go debt snowball or debt avalanche for student loans?” class=”aligncenter size-full wp-image-1309 jetpack-lazy-image” src=”https://illianahummerclub.com/wp-content/uploads/2021/01/which-student-loan-should-you-pay-first.png” alt=”Choosing which debt to pay off first was so stressful! This article really put it into perspective.” width=”400″ height=”693″ data-recalc-dims=”1″ srcset=”data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7″>

<img data-attachment-id="1309" data-permalink="https://www.modernfrugality.com/smallest-amount-or-highest-interest-student-loan/which-loan-first/" data-orig-file="https://i1.wp.com/www.modernfrugality.com/wp-content/uploads/2016/10/Which-Loan-First-e1501605428219.png?fit=400%2C693&ssl=1" data-orig-size="400,693" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"0"}" data-image-title="Which debt should I pay off first?" data-image-description="

Which debt should I pay off first?

” data-medium-file=”https://i1.wp.com/www.modernfrugality.com/wp-content/uploads/2016/10/Which-Loan-First-e1501605428219.png?fit=173%2C300&ssl=1″ data-large-file=”https://i1.wp.com/www.modernfrugality.com/wp-content/uploads/2016/10/Which-Loan-First-e1501605428219.png?fit=346%2C600&ssl=1″ loading=”lazy” data-pin-description=”If you are in the midst of paying off a ton of student loans, read this. All of the inoformation on the debt snowball and the debt avalanche so you can decide which way works for you! #debtpayofftips #debtsnowballtips #debtavalanchetips #moneytipsformillennials” data-pin-title=”Should you go debt snowball or debt avalanche for student loans?” class=”aligncenter size-full wp-image-1309″ src=”https://illianahummerclub.com/wp-content/uploads/2021/01/which-student-loan-should-you-pay-first.png” alt=”Choosing which debt to pay off first was so stressful! This article really put it into perspective.” width=”400″ height=”693″ data-recalc-dims=”1″>

<img data-attachment-id="4998" data-permalink="https://www.modernfrugality.com/smallest-amount-or-highest-interest-student-loan/mf-which-student-loan-should-you-payoff-first_-highest-interest-rate-or-largest-balance__/" data-orig-file="https://i2.wp.com/www.modernfrugality.com/wp-content/uploads/2016/10/MF-Which-Student-Loan-Should-You-Payoff-First_-Highest-Interest-Rate-or-Largest-Balance__.jpg?fit=735%2C1102&ssl=1" data-orig-size="735,1102" data-comments-opened="1" data-image-meta="{"aperture":"0","credit":"","camera":"","caption":"","created_timestamp":"0","copyright":"","focal_length":"0","iso":"0","shutter_speed":"0","title":"","orientation":"1"}" data-image-title="Should you go debt snowball or debt avalanche for student loans?" data-image-description="

If you are in the midst of paying off a ton of student loans, read this. All of the inoformation on the debt snowball and the debt avalanche so you can decide which way works for you! #debtpayofftips #debtsnowballtips #debtavalanchetips #moneytipsformillennials

” data-medium-file=”https://i2.wp.com/www.modernfrugality.com/wp-content/uploads/2016/10/MF-Which-Student-Loan-Should-You-Payoff-First_-Highest-Interest-Rate-or-Largest-Balance__.jpg?fit=200%2C300&ssl=1″ data-large-file=”https://i2.wp.com/www.modernfrugality.com/wp-content/uploads/2016/10/MF-Which-Student-Loan-Should-You-Payoff-First_-Highest-Interest-Rate-or-Largest-Balance__.jpg?fit=400%2C600&ssl=1″ loading=”lazy” width=”400″ height=”600″ data-pin-title=”Should you go debt snowball or debt avalanche for student loans?” data-pin-description=”If you are in the midst of paying off a ton of student loans, read this. All of the inoformation on the debt snowball and the debt avalanche so you can decide which way works for you! #debtpayofftips #debtsnowballtips #debtavalanchetips #moneytipsformillennials” src=”https://illianahummerclub.com/wp-content/uploads/2021/01/which-student-loan-should-you-pay-first.jpg” alt class=”wp-image-4998″ srcset=”https://illianahummerclub.com/wp-content/uploads/2021/01/which-student-loan-should-you-pay-first.jpg 400w, https://illianahummerclub.com/wp-content/uploads/2021/01/which-student-loan-should-you-pay-first-2.jpg 200w, https://illianahummerclub.com/wp-content/uploads/2021/01/which-student-loan-should-you-pay-first-3.jpg 735w” sizes=”(max-width: 400px) 100vw, 400px” data-recalc-dims=”1″>

Jen Smith is a personal finance expert, founder of Modern Frugality and co-host of the Frugal Friends Podcast. Her work has been featured in the Wall Street Journal, Lifehacker, Money Magazine, U.S. News and World Report, Business Insider, and more. She’s passionate about helping people gain control of their spending.

Source: modernfrugality.com

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How to Build Credit Without Student Loans

June 6, 2016 &• min read by Jeanine Skowronski Comments 0 Comments

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College graduates saddled with student loans may find this hard to believe, but there is one upside to having to pay back all that debt: It helps you build credit.

That may seem like a small consolation — particularly if the balances you owe are even average — but credit can be hard to come by. Of course, all hope isn’t lost for those who don’t have student loans.

Here are some ways to build credit without that kind of debt.

1. Get a Secured Credit Card

The Credit Card Accountability Responsibility and Disclosure (CARD) Act prohibits lenders from giving credit cards to anyone under 21 who doesn’t have a willing co-signer or a demonstrated ability to repay, but if you’re over that age or you have a source of income, you can apply for some entry-level plastic.

Secured credit cards — which require you to put down a deposit that serves as your credit line — are specifically designed to help people repair or build credit. These cards generally require a deposit to “secure” the limit of the credit card. (You can go here to learn more about the best secured credit cards in America.)

There are also student credit cards geared to young borrowers that could be worth considering. The better ones have low credit limits that can keep new borrowers out of trouble and tout rewards or alerts designed to build smart-spending habits.

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2. Become an Authorized User

If you can’t qualify for a credit card, you may want to see if a parent, guardian or family friend is willing to add you as an authorized user to one of their credit cards. Authorized users aren’t responsible for paying off an account, but will get credit (pun intended) for any good activity associated with it. Just be sure to have the primary cardholder check if the issuer reports authorized users to the major credit bureaus, since not all of them do so.

3. Take Out a Credit-Builder Loan

An alternative to starter credit cards, credit-builder loans, offered by some credit unions and banks to help people improve their credit, allow you to borrow a nominal amount (often $1,000 or less) and make payments for 12 to 24 months. The payments are deposited in an interest-bearing CD or savings account. These loans typically have relatively low interest rates and can help people with a thin credit history develop a more solid credit profile as long as on-time payments are reported to the three major credit reporting agencies. (Again, you may want to check this ahead of time.)

4. Apply for a Personal Loan

You may be able to qualify for a personal loan. These installment loans do not require collateral and typically have slightly higher interest rates than secured loans. A bank or credit union that you have a relationship with may be willing to extend financing, though you may be asked to get a co-signer.

5. Establish Good Habits

Of course, you’ll only build good credit if you use any financing you are able to obtain wisely. You can establish a good credit score over the long term by making all your payments on time, keeping debt levels lower than 30% (ideally 10%) of your total available credit limit(s), and adding a mix of credit accounts (revolving lines, like credit cards, and installment loans, like an auto loan) as your score and wallet can handle them.

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You can track your progress by viewing your two free credit scores each month on Credit.com. If you make a misstep, you may be able to fix your credit by disputing errors on your credit report, identifying your particular credit score killers and coming up with a game plan to address them.

More on Credit Reports & Credit Scores:

Image: LifesizeImages

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Source: credit.com

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