Federal and private loans are different animals
Federal loans carry income-driven repayment options, deferment, forbearance and potential forgiveness pathways. Private loans generally carry none of those, and their rates are often variable. That difference should drive your strategy: aggressive payoff usually makes sense on private loans, while federal loans deserve a closer look at whether a forgiveness route applies first.
Where extra payments go matters
Servicers will, by default, spread an extra payment across all your loans or treat it as paying next month's bill early. Neither maximises the benefit. Written instructions to apply the extra to the principal of the highest-rate loan — and to keep the next due date unchanged — can be worth thousands over the life of the debt.
Interest capitalisation
Unpaid interest can be added to the principal at certain events — leaving a deferment, exiting a grace period, or leaving certain repayment plans. Once capitalised, you pay interest on that interest. Paying accrued interest before a capitalisation event, where you can, avoids the compounding.
Refinancing: the one-way door
Refinancing federal loans with a private lender can lower the rate substantially, but it permanently forfeits income-driven repayment, federal forbearance and all forgiveness eligibility. For a borrower with stable high income and no forgiveness prospects, it can be a clear win. For anyone whose income might fall, it removes the safety net exactly when it would be needed.
A workable sequence
- Capture any employer retirement match.
- Build a small emergency fund.
- Clear credit card debt.
- Attack the highest-rate student loan with everything spare, minimums on the rest.
- Revisit annually — rates, programs and your income all change.