Student Loan

[cnich123]

My wife and I graduated last May and have about 160k, with an average of 6.8 percent, in student loan debt, yay! We started paying them in December. We have it set up now so we both will pay off the debt in 10 years. $400 goes towards mine and $1400 goes towards hers. Our ultimate goal is to pay it off within 5 years if not 3-4.

We have about 3k-4k that we would like to put towards the loans every month.

Would it be more beneficial to try and pay off mine, @ 30k, as fast as possible and use the snowball affect towards hers, @ 130k? While obviously paying her minimum payment for the 10 year plan. I am trying to get some advice for the best way to approach this situation. Thank you in advance for any information! If you need any more specifics please let me know! Thank you, thank you, thank you!

Chris

[disneysteve]

Put the extra money toward the loan with the highest interest rate.

[DinoSaur]

Others might be better here, but my line of thought is that the larger debt with the same interest rate is going to amass more in repayments than the smaller debt. Therefore, I'd be looking at getting rid of the big one first.

Although I'm unsure how the US student loans are compounded.

[disneysteve]

Others might be better here, but my line of thought is that the larger debt with the same interest rate is going to amass more in repayments than the smaller debt. Therefore, I'd be looking at getting rid of the big one first.

Nope. If the interest rates on the loans are the same then it doesn't matter which one you pay off first. The end result will be the same. It only matters if the rates are different in which case you want to pay off the highest rate first regardless of the balance.

[Wino]

I have to disagree with Disney Steve here. The question is not a math problem. The question is a psychological problem.

First, answer these questions honestly: Are you 100% committed to paying off these debts before you go further into debt? Are you going to buy a car, a house, an ATV, home improvements, or anything else on credit before these debts are paid?

Depending on your answer, the best course of action will be determined. If you are truly committed to getting out of debt, and nothing will make you waver from that goal, then DS's method is correct. If you are not so-committed, then it really doesn't matter which one you pay first. You're just as well off paying the ten-year plan, as you're going to be paying interest for the rest of your life on the other debts, most likely.

Also, the "highest interest rate no matter what" method is not always best. Let's assume you have ten loans (or twenty or thirty) and credit cards. Each one has a small payment, but altogether, you have only a tiny bit of money left over at the end of the month to do anything at all beyond subsistence living. A few years of that, while your largest bill is whittled down but never paid off, and even the most ardent resolve will be tested. In that case, freeing up some cash from the smaller-but-lower-interest loans being paid off would be psychologically the way to go to give you some breathing room to live your life while you pay off your previously-incurred debt.

There's a reason why there are different ways to pay down debt, and the one-size-fits-all-because-of-the-math method is not always the best. Any absolute statement is pretty much suspect on its surface.

[disneysteve]

Would it be more beneficial to try and pay off mine, @ 30k, as fast as possible and use the snowball affect towards hers, @ 130k?

I have to disagree with Disney Steve here. The question is not a math problem. The question is a psychological problem.

I didn't see anything in the original post to suggest that this wasn't a math problem. OP asked which way is more beneficial. The answer to that question depends on the interest rates of the loans.

What you say about the psychological factor is certainly true for many people. I won't disagree with you on that. I just don't see that it applies to this particular situation.

[~bs]

I'd pay down the smallest balance first. Reason being is that once a loan is paid off, you free up cash flow to either apply payments to the other loan, save the money elsewhere, or spend the money. If you direct all your money towards a big loan balance (with higher interest rate), then run into trouble, you can't exactly pull your excess "equity" out. So the smarter approach is to take care of the smaller loan balances first, which reduces the minimum obligation amount on your bills monthly.

I'd make the same argument towards most any other type of loan, excluding an ultra low interest or 0% loan. Credit card/auto/other loans should be paid off before plowing more money into large loan balances such as mortgage or student loans.