See image attached. I graduated back in May. Even though my loans are in forbearance right now due to COVID and I'm still in my grace period for payments, I wanted to get a head start on figuring out the best way to pay them down in terms of minimizing my weighted average interest rate for a given payment. Is it just to aim for the highest interest rates regardless of total balance outstanding? Looking for most mathematically efficient method. Thanks.
Is it just to aim for the highest interest rates regardless of total balance outstanding?
Yes. It's really that simple: pay off the loans in order of interest (highest first).
This assumes that there are no other differences between the loans (forbearance, chance of loan forgiveness, pre-payment penalties or rewards, etc.)
The goal should be to minimize the amount of interest paid, not necessarily the rate. To do this, pay the most to the loans with the highest rate first (regardless of balance). That reduces the principal on those loans more, reducing the amount of interest that is charged.
You also reduce the interest paid by paying more than the minimum amount. In fact, the sooner you repay the loans, the less the interest rate matters. Most loans calculate payments that amortize the loans over 10 or more years. You can reduce the interest paid drastically by having a plan to pay them off in 5 years or less. If you can set up your budget to pay off $1,000 a month, you can knock out these loans in 3 years, and the interest paid will be reduced from almost $8,000 to just over $2,000.
