Author Topic: Which Debt to Prioritize  (Read 3948 times)

Eric9064

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Which Debt to Prioritize
« on: January 14, 2016, 09:56:52 AM »
I am currently struggling with which of my debts I should prioritize and would appreciate any suggestions that the community has to offer.

Car: 14k at 5.89%
Mortgage: 156k at 4.38%
Student Loans w/ interest rate above 6%: 10k

I am currently putting as much extra $ as I can on the student loans as I can each month (~$600 a month), $500 extra on the mortgage and making the minimum payment on the car loan. Part of me thinks putting the extra on the mortgage at this point may not be the best move at this time, but the fact that only making the minimum monthly payments would have a negligible impact on the principal bothers me to no end (I just took out the mortgage so almost all the payments go towards interest).

Would appreciate any thoughts/recommendations.

Thanks
« Last Edit: January 14, 2016, 10:00:42 AM by Eric9064 »

Greenback Reproduction Specialist

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Re: Which Debt to Prioritize
« Reply #1 on: January 14, 2016, 10:11:45 AM »
I would suggest the student loan debt, for three reasons.

1. I like Dave Ramsey's philosophy on paying down the smallest debt first. Being laser focused, in his words, and getting one knocked out will give you a shot of motivation to attack the next.

2. Student loan debt NEVER goes away, even in bankruptcy, the IRS can garnish your wages to get at the money you owe. I would get rid of this rope around your neck ASAP.

3. It has the highest interest rate.

Bill76

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Re: Which Debt to Prioritize
« Reply #2 on: January 14, 2016, 10:24:12 AM »
Agreed. Kill the student loan first, then the car (assuming you can't trade down to an older vehicle to eliminate the loan sooner).

After that, you can think about pre-paying the mortgage or just upping your investments. Most people here would argue that investing will yield better returns in the long run, but people get emotional about mortgages, so at that point, just do whatever makes you sleep better at night.

Eric9064

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Re: Which Debt to Prioritize
« Reply #3 on: January 14, 2016, 10:30:17 AM »
Thanks for the advice. I am leaning towards killing the student loan and then the car. Once that is done, I will have to reassess as I have a substantial amount of additional student loans that carry an interest rate of less than 4% ($180k).

andy85

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Re: Which Debt to Prioritize
« Reply #4 on: January 14, 2016, 10:31:57 AM »
Agree with the above

Minimum on mortgage
Minimum on car
Dump all you can into the SL until its gone

-then-

minimum on mortgage
minimum + everything you were paying on the SL goes to the car payment until its gone

-then-

(for my personal taste) minimum on mortgage and save save save

frugalnacho

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Re: Which Debt to Prioritize
« Reply #5 on: January 14, 2016, 11:43:17 AM »
I am currently struggling with which of my debts I should prioritize and would appreciate any suggestions that the community has to offer.

Car: 14k at 5.89%
Mortgage: 156k at 4.38%
Student Loans w/ interest rate above 6%: 10k

I am currently putting as much extra $ as I can on the student loans as I can each month (~$600 a month), $500 extra on the mortgage and making the minimum payment on the car loan. Part of me thinks putting the extra on the mortgage at this point may not be the best move at this time, but the fact that only making the minimum monthly payments would have a negligible impact on the principal bothers me to no end (I just took out the mortgage so almost all the payments go towards interest).

Would appreciate any thoughts/recommendations.

Thanks

I understand what you are saying, and the same thing irked/irks me about my mortgages.  I think it really helps to lump all my debt together and consider it as a single number that I owe.  Does it really matter if I have 100 loans of $1k each, or a single $100k loan? Ultimately it all adds up to $100k, and I have to pay it all back, so paying it back in the order that will cost me the least amount of interest is the most rational decision. 

I say total it all up and just consider it as a single quantity you owe.  Then pay off the highest interest loans in that order while making the regular payments on the other loans.  You will see your total amount of debt decrease faster, and will end up paying less interest overall, and to me that is far more satisfying especially when I see the values for myself in my spread sheets.   

JJsfr

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Re: Which Debt to Prioritize
« Reply #6 on: January 14, 2016, 11:48:09 AM »
May be that depending on your marginal tax bracket/income level, the SL interest is tax deductible. It may affect where it falls in the order you pay the debts off.

Eric9064

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Re: Which Debt to Prioritize
« Reply #7 on: January 14, 2016, 12:19:19 PM »
JJsfr, thanks for the input. Unfortunately (fortunately?) I do not qualify for the tax deduction.

Frugalnacho, your point makes a lot of sense, and this was my general inclination when I started researching the best way to go about eliminating my debts. I still lean towards this line of thinking, but you see a lot of arguments re: good debt (mortgage/student loans) v. bad debt (car) and that you should aim to eliminate the bad debt first. That being said, all my debts, good or bad, are collecting interest, so it seems to make sense to focus on the higher interest rate debt and not on the "type" of debt it is.

zephyr911

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Re: Which Debt to Prioritize
« Reply #8 on: January 14, 2016, 12:39:52 PM »
Second the above... I strongly support the highest-APR-first approach, as well as placing new investments ahead of paying down low-interest debt. With average inflation at 3%, you're effectively paying nearly nothing on the larger debts, and you can count on whole-market ETFs or other broad index investments to return well above 4% after inflation... so keep those debts current with minimum payments, and grow your stash before using it to smash them.

former player

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Re: Which Debt to Prioritize
« Reply #9 on: January 14, 2016, 02:10:48 PM »
If you prioritise your student loan and put both the $600 and the $500 towards it, it will be gone this year.  If you can scrounge up a bit extra it could be gone by the summer.  How's that for incentive?

gliderpilot567

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Re: Which Debt to Prioritize
« Reply #10 on: January 14, 2016, 02:51:06 PM »
For general discussion and not specifically tailored to OP's question but perhaps of interest to the focum:

There are usually 2 alternative loan payoff approaches suggested:

1. Pay off debts w/ highest interest first
2. Pay off smallest debt first

I have discovered a third approach, which can be of use when remaining principal amounts are similar but loan periods are widely different: pay off the one with highest monthly payment first, in order to free up the cash flow. This can help if you're living on the ragged edge, have variable income, and/or have anticipated expenses in the near future. If this turns out to be the higher interest rate loan, great. If not, you will end up paying more interest in the end, but you'll have more room to maneuver each month since your monthly liabilities will be lower.

This is only useful if remaining principal amounts are relatively similar and you can pay off either one in a short time frame (2-4 months). It won't work, for example, if you use it to decide to pay off a mortgage before paying off a car or student loan. And again it helps only with cash flow; not (necessarily) with how much interest you'll pay in the end.

katsiki

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Re: Which Debt to Prioritize
« Reply #11 on: January 14, 2016, 02:56:53 PM »
Have you considered refinancing the car?  You can easily find 1.99% APR and sometimes lower.

zephyr911

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Re: Which Debt to Prioritize
« Reply #12 on: January 14, 2016, 03:04:37 PM »
For general discussion and not specifically tailored to OP's question but perhaps of interest to the focum:

There are usually 2 alternative loan payoff approaches suggested:

1. Pay off debts w/ highest interest first
2. Pay off smallest debt first

I have discovered a third approach, which can be of use when remaining principal amounts are similar but loan periods are widely different: pay off the one with highest monthly payment first, in order to free up the cash flow. This can help if you're living on the ragged edge, have variable income, and/or have anticipated expenses in the near future. If this turns out to be the higher interest rate loan, great. If not, you will end up paying more interest in the end, but you'll have more room to maneuver each month since your monthly liabilities will be lower.

This is only useful if remaining principal amounts are relatively similar and you can pay off either one in a short time frame (2-4 months). It won't work, for example, if you use it to decide to pay off a mortgage before paying off a car or student loan. And again it helps only with cash flow; not (necessarily) with how much interest you'll pay in the end.
It all just depends on exactly how hair-on-fire your debt situation is. The more breathing room you have, the more you can afford to focus on long-term priorities like minimizing total interest and maximizing total investment return. Highest APR first is the ideal but does the most good if you have everything under control. MMM types think of snowball as a training-wheels approach geared more toward emotional reward than maximum benefit, but it can be appropriate in some situations. And if debt is so bad that cash flow is constrained and maybe negative some months, then it makes sense to focus on what will alleviate the cash crunch in the least time.

Eric9064

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Re: Which Debt to Prioritize
« Reply #13 on: January 15, 2016, 10:20:27 AM »
Thanks for all the great advice. After considering everything I have heard and checking my finances, I am going to pay the minimum monthly payments on my car and mortgage and dedicated at least $1500 extra a month to paying of the student loans.

Katsiki, I had not considered refinancing the car loan, but have now done some research and this seems like an obvious step to take. Thanks for the advice.

JJsfr

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Re: Which Debt to Prioritize
« Reply #14 on: January 15, 2016, 10:43:39 AM »
Might as well look into refinancing the student loans too. Whether it's through a private lender or heloc (since you don't need to worry about keeping it tac deductible), you can probably find a lower rate.

Jack

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Re: Which Debt to Prioritize
« Reply #15 on: January 15, 2016, 11:00:59 AM »
Might as well look into refinancing the student loans too. Whether it's through a private lender or heloc (since you don't need to worry about keeping it tac deductible), you can probably find a lower rate.

But if you do that, don't forget to consider what effect it'll have on things like eligibility for deferment/forbearance, IBR and whatnot.

frugalnacho

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Re: Which Debt to Prioritize
« Reply #16 on: January 15, 2016, 11:14:44 AM »
Might as well look into refinancing the student loans too. Whether it's through a private lender or heloc (since you don't need to worry about keeping it tac deductible), you can probably find a lower rate.

But if you do that, don't forget to consider what effect it'll have on things like eligibility for deferment/forbearance, IBR and whatnot.

He only has $10k in student loans and 2 posts up says he is going to crush it by throwing at least $1500/mo extra at it.  He'll have that bitch paid off in like 5 months or less. 

onlykelsey

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Re: Which Debt to Prioritize
« Reply #17 on: January 15, 2016, 11:16:39 AM »
Quote
He only has $10k in student loans and 2 posts up says he is going to crush it by throwing at least $1500/mo extra at it.  He'll have that bitch paid off in like 5 months or less.


Agreed.  Plus if he has a short credit history, two inquiries might not be a great idea for his score. ALthough I suppose he already has a mortgage, so who cares about the score in the short term.

jms493

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Re: Which Debt to Prioritize
« Reply #18 on: January 15, 2016, 12:01:29 PM »
Thanks for the advice. I am leaning towards killing the student loan and then the car. Once that is done, I will have to reassess as I have a substantial amount of additional student loans that carry an interest rate of less than 4% ($180k).



Are you a Doctor or a Lawyer?

Eric9064

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Re: Which Debt to Prioritize
« Reply #19 on: January 15, 2016, 12:22:08 PM »
haha. I am an attorney. The loans are from law school. The advisability of taking on such debt is for another thread, but fortunately I was able to obtain a position out of law school that justified taking on the debt (or at least made it bearable).

I did refinance my student debt with Sofi (it is where the 180k debt is held). The 10k in higher interest rate loans is the result of a screw-up during the refinancing process which left balances on the original loans.

jms493

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Re: Which Debt to Prioritize
« Reply #20 on: January 15, 2016, 03:21:50 PM »
ok then...pay that shit off asap.  I hope you work for a major firm in NYC as an associate.  Should be able to pay that off in 3 years.

albireo13

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Re: Which Debt to Prioritize
« Reply #21 on: January 16, 2016, 06:02:21 AM »
You mention a mortgage.  Do you have much equity?

Another thought ....
   Remortgage your house (hopefully at a lower rate) to a higher amount, enough to cover paying off your car and the $10K student loan.
Several reasons:

1. 1 loan to payback instead of 3
2. your net interest rate for the student and car loan portions will be lower than before
3. you get the Fed off your back for that student loan
4.  you can deduct all your mortgage interest expenses from your income tax.  This makes the effective interest rate lower still

Another way to do this would be to take out a HELOC to pay off the car and student loan.  You'd get the benefits of lower interest rate and deductable interest payments without "messing" with your primary mortgage. 

justajane

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Re: Which Debt to Prioritize
« Reply #22 on: January 16, 2016, 06:42:01 AM »
Thanks for the advice. I am leaning towards killing the student loan and then the car. Once that is done, I will have to reassess as I have a substantial amount of additional student loans that carry an interest rate of less than 4% ($180k).

Holy cow! This should have been included in the original post. I really, really don't think you should prepay a mortgage with that much student loan debt. Once you pay off the car and the higher student loan debt and you put a decent amount in retirement vehicles, then start working on the huge ass loan.

Seriously, the mortgage should be way, way down on your list. You have to live somewhere, and if the payment isn't that high relative to your income, just stay where you are and pay the minimum.

Sjalabais

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Re: Which Debt to Prioritize
« Reply #23 on: January 16, 2016, 02:28:00 PM »
Out of curiosity: Why is the interest on all these loans so wild? The fed rate isn't excessive. I've read about Americans here paying close to 0%, we didn't have more than 2.3% on our mortgage, now killed, either. Student loan rates, floating, are 1.93% in Norway:
https://www.lanekassen.no/Tilbakebetaling/Renter-og-gebyrer/Rentesatser/