Author Topic: Which Loan Do I Pay Extra On Next?  (Read 4125 times)

BrooklineBiker

  • Bristles
  • ***
  • Posts: 389
Which Loan Do I Pay Extra On Next?
« on: November 29, 2013, 08:50:58 PM »
Hi everyone,

I am seeking the feedback of the group on the priority of repayment of my various debts. I recently paid off a credit card debt and wish to apply the funds formerly allocated to pay off the card to the payment of another debt. I would like to get the feedback of the forum on which loan to double down on.  Here is my scenario:
•   I am married with 2 children, ages 18 months and 7 years. Both are in daycare.
•   I make $60,000 per year working for a nonprofit.
•   My wife makes $70,000 per year. She has a $400,000 mortgage on our house.
•   We handle our finances pretty separately.
•   I owe about $26,500 in Federal Direct Student Loans. I pay 5.75%. The debts are not dischargeable in bankruptcy so I am motivated to pay those down quickly. If I switch to a different payment plan (requiring $70 per month in additional monthly payments), in 2024 I could probably get $1,000 or so of the loan discharged.*
•   I owe $6,300 on a credit card at 3% fixed interest.
•   I owe $4,500 on ACS private student loans. The rate is 3% variable. I am pretty sure I cannot discharge these loans in bankruptcy.
•   I owe $1,100 on a savers loan to DW.  The rate is 4% variable.

I can see different reasons to prioritize the various loans:
•   Paying off the spouse loan early would be a good faith gesture to DW.  It is also the smallest loan and would allow a sense of momentum through a relatively rapid payoff.
•   Paying down the federal loans student lines me up for loan forgiveness. It also gets rid of my only debts that I cannot discharge in bankruptcy. (This is not a goal of ours. However, our finances are shaky so this is worth considering).
•   Paying down the private student loans would be relatively quick and build momentum to pay down other loans. They likely would be a problem if we faced bankruptcy.

So what do you all recommend? Thanks! Happy holidays!

*I am eligible for the Public Service Loan Forgiveness Program

ASquared

  • Bristles
  • ***
  • Posts: 301
Re: Which Loan Do I Pay Extra On Next?
« Reply #1 on: November 29, 2013, 09:40:19 PM »
I would pay your wife first.  Only 1000 and at 4% is about equal to your 5.75% student loan after you consider the interest deduction on your taxes.  Then work on the 5.75 student loans.  However you didn't mention your savings/investment plans either - would it make sense to pay your minimums on your loans and invest some money too??

Interesting set up with the separate finances and taking a loan from your wife, but she has the mortgage.  I'm not sure I would be comfortable with this kind of set up but to each their own!

BrooklineBiker

  • Bristles
  • ***
  • Posts: 389
Re: Which Loan Do I Pay Extra On Next?
« Reply #2 on: November 29, 2013, 09:57:37 PM »
I would pay your wife first.  Only 1000 and at 4% is about equal to your 5.75% student loan after you consider the interest deduction on your taxes.  Then work on the 5.75 student loans.  However you didn't mention your savings/investment plans either - would it make sense to pay your minimums on your loans and invest some money too??

Interesting set up with the separate finances and taking a loan from your wife, but she has the mortgage.  I'm not sure I would be comfortable with this kind of set up but to each their own!
Hi Zsmom,
Thanks for the reply. I have a $1500 emergency fund. That is way too low relative to our shaky finances and our residence in an expense  megalopolis. My employer has a 2:1 match for a 403(b) plan and I am paying the maximum matchable amount.

BrooklineBiker

  • Bristles
  • ***
  • Posts: 389
Re: Which Loan Do I Pay Extra On Next?
« Reply #3 on: November 29, 2013, 10:05:23 PM »
How on earth did your wife get a 400k mortgage on a 70k salary?  Sounds like you have way more house than you can afford, but I guess if you are in the Boston area it is a challenge to find affordable housing.  If you aren't too upside down on the house, it might make sense to sell, given your concerns about potential bankruptcy.

It seems silly to me to drag out payment on your higher interest student loan for 10+ years just so that you can theoretically get a little bit of it discharged.  Personally, given the higher interest, that is the one I would tackle next.  That or the smaller loan from your wife.  Since that is smaller and easier to knock off, it might make sense to do that.

Good luck working this out.
Hi lhamo,
Thanks for your thoughts. It sounds like my best options for doubling down are the federal student loans or the loans from DW. (BTW-Finding affordable housing in this area is a serious problem. However, given our respective incomes, my preference was and remains renting.)

rocketman48097

  • Stubble
  • **
  • Posts: 200
Re: Which Loan Do I Pay Extra On Next?
« Reply #4 on: December 03, 2013, 09:31:57 AM »
Marriage is when two become one.  Separate finances is silly, we started combining our cell bills to save money even while engaged.  Combined finances also means you make decisions together in the best interest of your family unit.  With two kids, I can't even comprehend why you two wouldn't have combined bank accounts, credit cards (paid off in full each month of course) and even combined investment accounts when possible (outside of IRA's and 401k's).

Luck better Skill

  • Bristles
  • ***
  • Posts: 283
  • Location: Virginia
Re: Which Loan Do I Pay Extra On Next?
« Reply #5 on: December 03, 2013, 10:47:17 AM »
  Look at your budget/cash flow for a month over a couple of months.  It sounds like you have a cash flow problem.  If that is the case paying the smallest loan balance first is the best option.  That will free up more cash to pay down the next loan faster.  It can also be a strong motivator to keep paying off the loans.
  If cash flow is not a problem then you have more options including paying off the highest interest loan first. 
  Take a closer look and discuss it with your spouse.  Getting on the same page is important.
 

daverobev

  • Magnum Stache
  • ******
  • Posts: 3958
  • Location: France
Re: Which Loan Do I Pay Extra On Next?
« Reply #6 on: December 03, 2013, 12:49:12 PM »
Marriage is when two become one.  Separate finances is silly, we started combining our cell bills to save money even while engaged.  Combined finances also means you make decisions together in the best interest of your family unit.  With two kids, I can't even comprehend why you two wouldn't have combined bank accounts, credit cards (paid off in full each month of course) and even combined investment accounts when possible (outside of IRA's and 401k's).

It's a choice, and I would hesitate calling it 'silly' if it works for them. Some people like having control over their money, and there's nothing wrong with that.

BrooklineBiker

  • Bristles
  • ***
  • Posts: 389
Re: Which Loan Do I Pay Extra On Next?
« Reply #7 on: December 03, 2013, 09:44:43 PM »
  Look at your budget/cash flow for a month over a couple of months.  It sounds like you have a cash flow problem.  If that is the case paying the smallest loan balance first is the best option.  That will free up more cash to pay down the next loan faster.  It can also be a strong motivator to keep paying off the loans.
  If cash flow is not a problem then you have more options including paying off the highest interest loan first. 
  Take a closer look and discuss it with your spouse.  Getting on the same page is important.
 
Hi Luck,
Thanks for your thoughts. Cash flow is a problem. However, the smallest balance loan (what I owe DW) has among the highest payments of my debts.

Charlotte

  • Guest
Re: Which Loan Do I Pay Extra On Next?
« Reply #8 on: December 04, 2013, 02:21:29 AM »
I would definitely pay off your wife first. Happy wife and all!

Personally, I would pay off the credit card second and then the smaller student loan. Switch to IBR to the loan forgiveness option available, and then re-evaluate when the other debts are paid off.

Once those decisione are made, I'd go cry in my beer because Ellsbury is headed to New York....

Argyle

  • Pencil Stache
  • ****
  • Posts: 904
Re: Which Loan Do I Pay Extra On Next?
« Reply #9 on: December 04, 2013, 03:01:09 AM »
But why are your finances so shaky that you are considering bankruptcy?  Surely that's the bigger emergency, rather than which loan to pay off.  How did you get $7400 in credit card debt, and has the situation that caused that been conquered?  If your wife is the one with the mortgage, are you paying her a high rent?  Because otherwise a salary of $60,000 a year seems quite workable -- around twice the MMM yearly budget, if I understand correctly.  I know you didn't get into all this, but since we're all about the big picture, I thought I'd bring it up.