General Question

rowenaz's avatar

Which loans to pay off first...

Asked by rowenaz (2431points) August 8th, 2008

I am arguing with my sister about this: If you have an unsubsidized student loan, with 8% interest, and a subsidized loan, with 3% and a car loan with 5% interest, which are you better off paying down first? The 8% student loan is the largest amount, and the other two are smaller and an equal amount.

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28 Answers

tinyfaery's avatar

If you are paying 8% interest on even one of your student loans, you are paying too much. Consider consolidating.

I say pay the car loan first; it will raise your credit score by a larger amount than the student loans.

wrestlemaniac's avatar

student loans, education is important

jasongarrett's avatar

If you aren’t paying down your highest-rate loan first, you’re paying more interest than you need to.

seVen's avatar

the lower interest first because you’ll do it faster and its a HUGE motivator to be debt free for larger debts to pay off.

wrestlemaniac's avatar

nothing helps like motivation. :)

Randy's avatar

The car. They can reposess it. What are they gonna do, take back what you’ve learned? Haha.

Seriously though,one of the smaller ones. After they are paid off, you have that extra payment to put twards the larger sum.

wrestlemaniac's avatar

well then interesting, any way thanks for the discussion gotta go now smack down starts at 8:00 pm see ya.

nikipedia's avatar

Are you guys kidding? Is your goal to boost your self-esteem or get out of debt? Pay down the highest interest rate first. The end.

La_chica_gomela's avatar

Obviously the one with the highest interest rate to save your money. Who cares if it’s subsidized or not?

gailcalled's avatar

Well, we certainly cleared up Rowenaz’s problem.

@wrestle: where did you say you were going?

marissa's avatar

Is she getting the tax benefits of writing off the interest paid on student loans? It would depend on the amount of interest she is paying the amount she can write off and the amount she is paying on the other debt. The numbers would need to be crunched to see what is better. However, if taxes break are disregarded than the one with the highest interest rate is the best to pay off first from a financial standpoint, as long as she is paying the minimum required on all of them.

Judi's avatar

Highest interest!!

wrestlemaniac's avatar

Same!! and yes i’m back.

SuperMouse's avatar

If you itemize your income taxes, pay off the car first. the tax write off for the student loans lowers the effective interest rate. Once the first loan is paid off, use whatever you were paying on that one to pay off the student loan with the highest rate, and so on down the line until all the balances are zero.

rowenaz's avatar

No one is in danger of defaulting on any loans, and credit isn’t a problem. I said the high interest loan too, but neither of us actually crunched numbers to see what the interest would be for a tax write off. Thanks everyone.

wrestlemaniac's avatar

i’m not in this no more, finance, weak point.

Judi's avatar

i didn’t know you could write off the interest on a student loan. If that’s the case I would crunch the numbers. Great answer supernut!

marissa's avatar

Yes Judi, you can write it off. I think it is for the first 10 years of the student loan, but double check with the irs (irs.gov)

jlm11f's avatar

Pay the unsubsidized loans first. they have the highest rate…and they are unsubsidized. they are the worst of the lot.

ninjaxmarc's avatar

Pay highest and try to consolidate your student loans. Mine are at 3% after consolidating.

allengreen's avatar

I believe that the student loan cannot be paid down, it only gets paid ahead. I dropped a 5,000 payment on my student loan and it paid it ahead 3 years but did not go toward the principal even though I specified to apply the 5k to the principle.

Your option is to pay off the student loan in a single lump sum, or attack the other debt—I’d pay off the car, simply since many are upside down in the car loans, this will make it easier for you to get out of the car in the future.

Someone correct me if I am wrong about paying the student loan in one lump—I’ve called Nelnet a dozen times and that is what they gave me.

Keep in mind that if you make too much then you cannot write off Student Loan interest, or will only partially write it off.

NO offense, but there is a truck load of mis-information on this thread concerning this topic, I am not starting a fight, but financial myths pervade our consciousness to the advantage of the bank.

gooch's avatar

Paying off the highest interest first saves you the most $.

ht1979's avatar

I’m guessing student loans vary, but I could always send extra money to mine and have it applied to principle. My non-public ones were administered through Citibank.

Presuming you can pay the requisite monthly payments on the 3% and 5% loans, I’d chip away at the 8%. You’re paying a TON of interest on that given that it’s the highest balance AND the highest rate. Anything you’re writing off in taxes likely pales in comparison to what it’s costing you. I’d DEFINITELY suggest paying it down first, presuming you can call and verify that you can apply addition payments to principle. It may be tempting to have one of the smaller ones paid off, but financially speaking, you’re costing yourself money to allocate any extra to a lower-rate loan versus the 8%-er.

allengreen's avatar

So what did you decide to do?

rowenaz's avatar

Pay more to the highest.

AlfredaPrufrock's avatar

The financial peace program has a snowball strategy that’s great. It works like this: Decide how much you can afford to pay each month. Then make the minimum payment on the largest loans,and the biggest payment on the smallest. The smaller loan will pay off first. Keep paying the same amount, and roll the payment from the paid off loan to the next smallest. In other words, say you owe $10,000, $5,000 and $2,500. The minimum payments are $200, $150 and $100, or $450 a month. You determine you can pay $750 a month. Under this strategy, you allocate the $750 as $200 on the $10,000, $150 on the $5,000 and $400 on the $2,500. The $2,500 pays off in 8 months, and you then allocate the $750 as $200 on the $10,000 and $550 on the $5,000. The $5,000 pays off in 12 months, and you allocate the $750 to the $10,000, and it pays off in 12 months. The trick is not to take on new debt while you are still paying off the old.

rowenaz's avatar

Boy I had to read that twice. So each time you pay off the smaller amount, you just migrate that money to the next smaller amount, while keeping the amount paid overall the same? And not taking on any new debt. GREAT!

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