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Car/Student Loan Pay Off With Savings or Payments

Started by Iconojett, December 27, 2019, 12:45:19 PM

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Iconojett

This is my first post and I am looking for some help to understand how best to handle my money. I am in the process of paying off two debts:

Unsubsidized Stafford Loan (Graduate Degree):

Current principal balance (w/ interest): $21,613.83

Interested rate: 6.6%

Current payment progress: I have not started making payments yet

Car Loan:

Current principal balance (w/ interest): $14,170.51

Interested rate: 5.5%

Current payment progress:  I have been paying the loan amount at $449 and paying an additional $600 monthly.

My savings vehicles include a mutual fund that has been managed by my financial planner (going between 8-10% on average), a 457b account and a pension plan. I plan to pay off the car by the end of 2020. I have not yet devised a plan to best tackle the student loan. I could pay off both immediately with my savings as there is enough with either the mutual fund or the 457b. How should I proceed that makes sense when balancing interested payments on owed versus savings accrued (compounding interest and all)?

Thank you in advance. I have been racking my brain on this one for a while, but my Excel skills just aren't up to par.


WengerTodd

Quote from: Iconojett on December 27, 2019, 12:45:19 PM
This is my first post and I am looking for some help to understand how best to handle my money. I am in the process of paying off two debts:

Unsubsidized Stafford Loan (Graduate Degree):

Current principal balance (w/ interest): $21,613.83

Interested rate: 6.6%

Current payment progress: I have not started making payments yet

Car Loan:

Current principal balance (w/ interest): $14,170.51

Interested rate: 5.5%

Current payment progress:  I have been paying the loan amount at $449 and paying an additional $600 monthly.

Thank you in advance. I have been racking my brain on this one for a while, but my Excel skills just aren't up to par.


So... first thing I'm going to say... it's the night of December 29th. You have 2 more days left for the remainder of 2019.

Student loan payments are Tax deductible... at least, the interest paid on them is. I've never had student loans (always paid for classes as I took them), but if you can make a payment before the end of the year, you can deduct the interest payments off on your taxes. So keep that in mind as you make your decision.

Next, do not wipe out your savings to pay for these. You always want to have a savings account. I'm in the same boat as you. I have a vehicle that I bought earlier in the year, and I was struggling at the thought of whether I should pay it off immediately. If I did, it would take a sizeable hit on my savings account, which I don't want to do. So what I'm doing instead is making triple payments. It all depends on how your loan works. Mine is strange, but you can read about that here if you're interested: https://www.financialsamurai.com/forums/financial-advice/car-loan-question-'simple-interest'/

As for which loan and what to pay off first, I realize your 6.6% interest rate student loans are higher than your 5.5% car loans, but I think you'd want to focus more on trying to make the vehicle payments first. Here's why:

1 - There is no side-benefit at-all to having vehicle debt, at all. You don't get any tax benefits.
2 - When your vehicle is paid off, you can significantly lower your insurance cost by raising your deductible.
3 - While there is no "good" debt, vehicle debt is even less good than student loan debt.
4 - The "snow-ball" debt payment method is actually thing, the lower vehicle debt makes it a quicker kill.
5 - Your vehicle is *only* a liability right now. Pay it off and it becomes a semi-asset that is yours to do with as you please.


For your Student Loan debt, here are my thoughts:
1 - You can deduct interest payments up to $2,500 on your Federal Taxes (and maybe something for State? I don't know)
2 - You have significantly more debt in your student loans than you do in your vehicle loan, so that should be a longer-term payoff.


If you were asking my opinion on what I would do if I was you, first question I'd ask is... how much savings do we have? If we have, say... $35,000. At that point, I would say it's worth it to go ahead and pay off the vehicle. You'd still have a good sum of savings for contingencies, and you've now knocked out a substantial debt. If you only have $15,000 in savings, then maybe take $5,000 of that and put it towards principle on the vehicle, and then continue to make heavy payments till it's paid off in 2020.

At the same time, if you can, begin making payments on your student loan debt. Like I said, you can claim the interest payments on your Federal taxes. These interest deductions are an above-the-line tax break that you can claim regardless of whether you itemize your deductions or take the standard deduction.


Hope that helps!!!

Sam

I got a believe that you can get a student loan interest-rate lower than 6.6%. The 10-year bond yields  is at 1.9%. I would refinance that
Regards,

Sam