Paying off debt with debt...advice needed

[Blue Leader]

Here's the situation: My wife is in grad school for 2 more years and her employer is reimbursing her tuition after grades come out every semester. We are paying for the tuition with subsidized loans, then get reimbursed. However, we are offered 3k more in subsidized loans each year than what is needed.

Now here's the fun part. I have about 30k in student loans from undergrad.

20k is locked at 4.25%...sweet.
7k is locked at 8.75%..bah
2.5k is vairable at 7.5%...also bah.

We took the max ($8500) in subsidized loans we could and I want to use the extra to pay off the 2.5k loan or pay down the 7k loan.

Which one would you apply this money too?

Obviously we know this will need to be paid back, but not for 2.5 years. If we pay down high interest loans, this will save us money. (and allow us to pay more on the other loans each month.)

What would you do?

Edit: I am leaning toward paying off the 2.5k loan...

[autoxer]

If you are doing it to save interest.... then use it on the highest interest loan.

[sweeps]

Isn't there a cap on the interest rate on variable loans? If the cap is <= 8.75%, then pay off the $7k loan first.

[CreditExpert]

go for the 7k loan 1st. When its paid up, add this repayment to the 2.5k loan, it will dissapear fast