Student loan or car loan? Which to pay?

[Pembo]

We have a student loan (10 yrs, 7%) and a car loan (5yrs, 1.9%). Which one would you pay extra payments???

 

[maroo]

isn't the interest on the student loan tax deductible?

I would consider that...but otherwise...having a paid off car feels GREAT!

 

[cjnix29]

I would pay the car. Like PP said, you can atleast deduct up to 2500 of student loan interest on your taxes. Once you pay off the car, then roll that into the student loan.

 

[hffmnheidi]

Pay the lowest amount one off first and then roll those extra payments into the highest amount one later.

 

[donalduck]

Ya what hffmnheidi said.

 

[WDWisTheBest]

I would pay the car. Like PP said, you can atleast deduct up to 2500 of student loan interest on your taxes. Once you pay off the car, then roll that into the student loan.

Would it be of value to know the principal amount of each loan? They may not be equivalent, and probably are not.

 

[sk!mom]

It would help me to know the loan amounts, as well. But given the information given, I would pay off the higher rate debt first.

 

[bellarella]

Paying the highest rate loan first will always save you the most money, unless you have a tax break.

You should figure out what your deduction is for your student loan interest. There is a max $2500 deduction, but it phases out between $55,000 and $70,000 ($115,000-$145,000 if you are married and filing jointly).

Also, this is a deduction, not a credit, which means it only reduces your taxable income, it doesn't come off the top of your tax bill. So to figure out the "benefit" of the student loan interest, you need to figure out your tax liability with it and without it. (For example, if you got the full $2500 deduction and all of that money was taxed at the marginal 25% tax rate, your taxes would be reduced by $625. If that money was taxed at the marginal rate of 15%, you'd only be reducing your taxes by $375.)

With that big of an interest rate difference, it is unlikely that paying down the car loan first will be the option that saves you the most money.

While the "snowball" approach is emotionally satisfying, it only makes financial sense if you would otherwise not pay down your debts. (Snowballing is better than not making progress on your debts, but if you will make $X of extra payments on your debts regardless of whether or not you get the emotional satisfaction of seeing one paid down, then paying the highest rate first will save you the most money in the end.)

 

[racechick8293]

I would pay off the one with the higher interest rate first.

 

[Pembo]

The amounts of the loans are similar. It's the interest rates and monthly payments that are huge. The SL is a small payment, for 10 years. The car is a larger payment for only 5 years.

I looked at the SL interest and for the first few years we'll have over $1K for a deduction but after that it goes down considerably.

I think paying on the car might be better...when it's paid off we'd have more $ to put on the SL.

Any more thoughts?

 

[allyphoe]

Even with the tax break, you're mathematically better off paying off the student loan first.

 

[Marionnette]

We have a student loan (10 yrs, 7%) and a car loan (5yrs, 1.9%). Which one would you pay extra payments???

Pay off the student loan. It can't be discharged in bankruptcy. Not that you are destined to declare bankruptcy but you never know....

Plus it has the higher interest rate and the longer term. You will save more interest in the long run if you attack the student loan first.

 

[hpfan100]

Do you qualify for any student loan dismissal programs? If so pay off the car first and then worry about SL.
Do you have SL through Sallie Mae? If so you could open an Upromise account to see if that would help pay off SL. You probably won't get much from that but 100 a year would be a nice free helper. Also check how SL helps/hurts taxes after you file in 2011 and see if that is important to you.

Good Luck!!

 

[firstcruise]

Pay the student loan and then auto loan.

 

[Hannathy]

I would always pay the higher interest rate off first.

1.9% is virtually nothing, take a look at how much extra you are actually paying overall in other words how much above what you borrowed you will have paid back and at 1.9 it won't be very much. Then look at the same thing with your other loan.


Flip it around, would you rather have someone give you 10% more money or 1.9% more money?

 

[JaymeC]

I would do the student loan first for one major reason, I hate student loans. You're locked into them. If (god forbid) something financially wrong happens, there's no way to get away from them. They're yours. For life. Failing that you die or get disability. That makes me nervous, so I try to pay them off very quickly.

 

[snowywhite89]

I would pay off the higher interest rate. In your case that is the student loans.