High Student Loan compared to Loan CC debt

[ymillion]

Hi

My debt situation:
Student loans: ~$23,000 @ 5.62% - minimum: ~$160/mo
CC: ~$2300 @ 8.5% - minimum ~$75

My understanding is conventional wisdom says to pay off higher interest first. But in this case, I'm wondering if the math is heavily enough weighted, that I'm still actually losing more money every month to lower interest rate buy much larger principle student loan.

I'm currently starting a new job, so I'm not clear on how much savings I'll have, but my goal is to have ~$500/mo go towards debt payment.

According to numbers I got from mint.com, if I just pay my minimum on the credit card, it will get paid off in ~3 years time, and my total extra interest paid will only be ~$300. To to me it seems I'm not paying much of a penalty for keeping debt on the credit card.

But the student loan, at the minimum payment amount, accrues a lot of interest, and barely chips away at the principle, so it seems important to pay as much extra as possible to that debt.

My student loan is currently in forebearance, so I'm not due to pay for several months. I would like to make an interest payment soon, once I have a sense of how much I can afford. But the other thing I'm concerned about is setting up an emergency fund. And I'm wondering if I should prioritize the EF before I start paying off the debt.

Thanks, and appreciate any feedback.

[disneysteve]

The "conventional wisdom" you refer to is absolutely correct. It doesn't matter what the balance is. It only matter what the interest rate is.

If you pay $2,300 to your credit card today, you'll save 8.5% interest or $195.50.
If you pay $2,300 to your student loan today, you'll save 5.62% interest or $129.26.

[skydivingchic]

In terms of saving the most money, paying the highest interest rate debt first will ALWAYS be the best method. It doesn't matter how much is owed at each rate, only the rate. I plugged your numbers into a debt calculator. If you pay the extra money toward the student loan, you will pay a total interest of $3383.64 and will pay off the SL in June 2016. If you pay the extra money toward the CC first, then roll it into the SL, you will pay a total of $3284.59 in interest and will have the SL paid off in May 2016. So, about $100 and one month saved by paying the higher interest rate first.

[Cassius King]

Going straight by the numbers isn't always the best road to take.

Myself, I would go right after the credit card of $2300 and pay it off asap. Then I would take the $500 a month and split it between the student loan and an emergency fund.

One reason I would pay off the credit card first. If you run into financial trouble, lose your job, you can put the student loan in forbearance or hardship. No such luck with the credit card. Finances aren't strictly about numbers always. There's a personal and emotional piece to it as well.

Best of luck.

[disneysteve]

Going straight by the numbers isn't always the best road to take.

Myself, I would go right after the credit card of $2300 and pay it off asap. Then I would take the $500 a month and split it between the student loan and an emergency fund.

One reason I would pay off the credit card first. If you run into financial trouble, lose your job, you can put the student loan in forbearance or hardship. No such luck with the credit card. Finances aren't strictly about numbers always. There's a personal and emotional piece to it as well.

Best of luck.

I agree about paying the CC first but not for the reason you've given. In fact, I would disagree with your reasoning. Student loan debt is not bankruptable. Credit card debt is. So if you ran into financial hardship, you can't ever escape the student loans. If you stop paying the student loans, they can garnishee your wages. If you stop paying your credit card, it messes up your credit score but that's about it.

[JustBill]

To your other point regarding an emergency fund. I do suggest you establish a modest reserve for the unexpected, if for no other reason than protection for your spirit. A couple grand should do nicely for someone in your place. You really are in a good situation, you don't have an enormous amount of debt, and more importantly you're thinking about it and addressing it head-on.

[Money Gal]

$1K Emergency Fund creation first.
If your company has a 401K matching program, then put the minimum into 401K you can to get the maximum matching funds (free money)
Then extra $s to credit card debt.
Then fully fund retirement/401K accounts to the maximum the government allows
Last student loans.

Student loans last due to generally lower interest rate, but also due to the deferment/forbearance provisions they contain. If you are involuntarily unemployed, no other loan lets you waive it for that period. I would not get rid of that flexibility lightly.