After three years without student loan payments, federal loan borrowers will start making payments this month. With the rising cost of basic essentials, some people may struggle to make ends meet. 

According to the U.S. Bureau of Labor Statistics, consumer expenditures are up 9% from 2021, as everything from housing to groceries is more expensive. If you’re having a tough time juggling your expenses and debt repayment, figuring out how to prioritize debt is critical. 

How to Prioritize Debt Repayment

Now that the federal student loan pause has ended, when do student loan payments resume? Your exact payment due date varies based on your loan terms, but all federal loan borrowers will begin repayment at some point in October. If you’re managing several kinds of debt, here’s how to prioritize your expenses: 

1. Cover the Basics

The basic expenses are the essentials you need to get through each day. These costs include your rent, utilities and groceries. Although you may be able to trim your spending in these areas or find cheaper options, these expenses are otherwise non-negotiable and should be your first priority so you can keep a roof over your head and food in the cupboard. 

Create a budget and list your income and all of your essential expenses. If the basic costs are too high, you may need to make some tough choices, such as getting another roommate or downsizing your home to live within your means. 

2. Establish a (Small) Emergency Fund

After budgeting for your basic living expenses, make a list of all your required minimum monthly payments. Hopefully, you have some extra cash after deducting your living expenses and debt payments. If so, it’s wise to use that money to establish an emergency fund. 

According to the National Financial Capability Study, 30% of adults said they certainly couldn’t or probably couldn’t come up with $2,000 within the next month to cover an emergency expense. If you don’t have the money to pay for an unexpected emergency, you’re at risk of going into debt when someone goes wrong. 

Starting an emergency fund, even if it’s just $500 or $1,000, will give you a financial cushion against the unexpected and prevent you from racking up high-interest debt. 

3. Think About Consequences

If you’re like most people, you have several forms of outstanding debt. You may have a mix of student loans, credit cards, car loans and other lines of credit. 

When deciding which debt to pay first — or if money is tight, which accounts you’ll allow to fall behind — think about the consequences for missed or delinquent payments for each account type: 

• Secured loans: Secured loans, such as car loans, use your property as collateral. If you miss your payments, the lender can seize and sell your property to recoup their money. If you need your car to get to work or medical appointments, you can’t risk losing your vehicle, so keeping up with your payments should be a top priority. 
• Credit cards: Credit cards are unsecured, and creditors are limited in how they can recoup their money. When your account becomes delinquent, the creditor will report your information to the credit bureaus, which can damage your credit. And they can sell your account to collections, resulting in regular phone calls and costly fees.  But compared to other forms of debt, the consequences for missing credit card payments are usually less severe. 
• Student loans: Defaulting on your student loan payments can be a big problem; with federal loans, the loan servicer can garnish your wages and take your tax refund without getting a court order, so student loan repayment should be one of your top priorities. However, the government announced that it will have a 12-month “on-ramp” period that will last through September 30, 2024. During this time, the government won’t garnish ages, charge late fees or report negative information to the credit bureaus, so the consequences aren’t as harsh as they typically are for missing payments.

4. Look for Ways to Reduce Your Payments

Depending on the type of debt you have, there may be ways to reduce your payments, so your overall financial situation is more stable. For example: 

• Student loans: If you have student loans, you could lower your payment by enrolling in an income-driven repayment plan or refinancing your existing student loans. 
• Credit cards: If you’ve been a good customer and haven’t missed payments in the past, your credit card company may be willing to work with you. Contact your card issuer and ask for a lower rate; you may be eligible for a reduced APR, which could help you save money. 
• Car loan: Depending on your credit, when you take out your loan, you may have a high interest rate. Refinancing your current car loan could allow you to secure a lower interest rate or longer repayment term, so you could qualify for a smaller monthly payment. 

By lowering your payments, your other accounts may be more affordable, and you may have a better chance of staying on top of your payments. 

5. Focus on the Highest-Interest Debt First

If you are making all of the required minimum payments on your debt accounts and have some money left over, deciding where to allocate those extra funds can be challenging. However, the most cost-effective way to repay your debt is the debt avalanche method, where you put extra money toward the account with the highest interest rate. 

For example, the average APR for credit cards was  22.16% in 2023, while auto loans were 7.80%. And student loan rates start as low as 4.48%. If you had all three types of debt, you’d put any extra money toward your credit cards first since they have the highest rate. Once the cards were paid in full, you’d roll over that payment to your car loan and finally to the student loan. 

Juggling Multiple Types of Debt

There’s no question that managing several types of debt can be difficult. When deciding how to prioritize your debt repayment, follow this order: 

• Pay your essential living expenses. 
• Build a modest emergency fund. 
• Find out if you can lower your debt payments. 
• If you can’t afford all of your debt payments, focus on the debt with the worst consequences, such as car repossession. 
• If you have money to make additional payments, target the accounts with the highest interest rate first. 
• To free up extra money to repay your student loans and other debt, start a side hustle.  For example, you could rent out a room on AirBnB, list your car on Turo, walk dogs through Rover, clean houses through Handy or deliver groceries through Shipt.

To reduce your student loan payments, refinancing your debt can be a smart idea. And with ELFI, you can qualify for competitive rates and flexible terms. You can view ELFI’s refinancing eligibility requirements and get a quote online.

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