Which student loans to pay off first: Stafford or private?

December 15, 2009 7:03 PM

Student loans in the United States: I have larger fixed-interest Stafford loans, and smaller private loans tied to LIBOR. Which should I pay back first?

Thanks to anyone in advance for being patient enough to read this.

I'm just entering the beginning of my payback period for my student loans in the U.S. and I'm wondering which I should prioritize fiscally and pay off first, seeing as I'm going to have to lower my monthly payments on at least one set of loans.

So I have two sets of student loans:
- A set of three private loans with quite low interest rates (~3.29% right now - around LIBOR + 3%) but which may rise in the future;
- A set of four Stafford loans, three fixed at 6.8% and one mysteriously at 2.48%. (I have not yet consolidated, but plan on exploring that ASAP.) Together the Staffords add up to about 1.5 times the size of my private loans.

A part of what complicates the situation is my ignorance about consolidation, which is something that I have to explore further with Sallie Mae (who services my Staffords.) One of my loans is now a Department of Education loan (but not the 2.48 percent one...) and I have no idea if I can even consolidate those altogether.

The larger question I'm facing is this: I can focus on paying off the private loans, but get hit by the Staffords' higher interest rates compounding on an already significantly greater sum. And I'm assuming the interest rates, even fixed, will be even higher consolidated / pushed out.
Or,
I can focus on paying off my Staffords, but risk the LIBOR going up past six percent, as it has done in the past, which could really hurt down the line. If these were relatively small amounts I can see it not making much of a difference, but with sums as big as these (over $10,000 each) I don't want to take a decision lightly.

I feel more comfortable owing the government than owing a private lender, but apparently while I was in college the world decided that I could no longer make financial decisions based on fuzzy feelings. So I'm making them based on the hive mind's judgement instead. Thank you all.

posted by Muffpub to Work & Money (3 answers total)

Seems like the logical thing to do would be to pay off more of the 6.8% Stafford loans now to avoid interest, then tilt the balance over to paying the private loans once the LIBOR rate starts to rise again (say, past 2-3%). Most people think that it's unlikely to rise that high within the next year or two. It's hard to forecast what will happen after that.
posted by dacoit at 7:36 PM on December 15, 2009

Pay the highest interest loan first.

Yes, there's a chance that your variable loans may rise up past the 6.8% mark at some point, but it's a sure thing that you're paying 6.8% on the one loan now.

You have no way of knowing what the rates will do in the future, so go with the smart move now and you can reprioritize later, if need be.
posted by chrisamiller at 7:45 PM on December 15, 2009

The student loan consolidation rate should be a weighted average of your loan rates. Most importantly, that 2.48 one is tied to the 91 day T-Bill auction + 2.1 percent. Consolidating will lock in that rate; it seems very likely to go higher in the future. The 6.8 percent stuff should be fixed though. You can't consolidate your private loans with the Staffords though. So which group to pay ultimately depends on how much that 2.48 loan pulls the average down, and the future trajectory of "real" interest rates. You can't really look at those LIBOR numbers without considering inflation rates.

If you really want to poll the experts at where LIBOR will be in the future, you'd have to check interest rate swaps markets. Which is all very complicated and subject to error just as you are. Just pay the big interest rate first. Plus, as a citizen of the US, it's in my best interest you do so =)
posted by pwnguin at 9:18 PM on December 15, 2009