For many people, student loans are just one type of debt that a person has. Indeed, numerous individuals have credit card debt, car loans, mortgages, and other types of debt that need to be handled in addition to student loans. It is oftentimes difficult to determine how best to pay off student loans while also dealing with these other types of debt.
Of course, the best strategy is to minimize any debt you have in addition to student loans. During my student debt repayment saga, I did not have any kind of debt other than my student loans. I never had a credit card until I paid off most of my student loans, and although there are many benefits to having credit cards, not having one ensured that I was never indebted to credit card companies. In addition, I never had a car during my student debt repayment saga, so I never had to make car payments while paying off student loans. Furthermore, although it is sometimes advantageous to purchase a home while paying off student loans, I never had a mortgage until recently. Of course, some people need to borrow different kinds of loans due to life circumstances, but most people can minimize or eliminate other debt they have in addition to student loans.
One type of debt you should usually pay off before student loans is credit card debt. This type of debt typically has insanely high interest rates, and carrying a credit card balance can negatively impact your credit score. It almost always makes sense to pay off this debt before student loans due to the high interest rates. If you have credit card debt, you should look into refinancing options, since many companies will refinance this debt at lower interest rates. If you do refinance, it is possible that the interest rate on the refinanced credit card debt will be lower than some of your student loans. This is one of the few situations in which you may want to focus on paying off higher-interest student loans.
In addition, credit card debt is sometimes dischargeable in bankruptcy whereas student loans are almost never dischargeable, and this is another situation in which you might focus on paying off student loans. However, it makes sense to pay off credit card debt before attacking your student loans in most circumstances. If you have credit card debt, only pay the minimum amounts due on your student loans and devote any extra cash to paying off your credit card balance.
On the other hand, it almost never makes sense to devote extra cash to a mortgage over paying off student loans. Mortgages these days typically have interest rates far lower than the interest rates of student loans, so there is less of a penalty for keeping a mortgage than there is to having student loans. In addition, mortgages are usually larger than the amount of student loans a typical borrower has, so devoting extra cash to a mortgage usually does not influence your debt profile all that much. Furthermore, although only $2,500 of student loan interest is tax-deductible each year, and only if you make less than $80,000 annually, all mortgage interest for mortgages under $750,000 is tax-deductible. Since paying interest on a mortgage versus paying off student loans can save you money in taxes, it is usually more advantageous to devote extra cash to student loans over mortgages.
There is one situation in which it might make sense to devote money to a mortgage over student loans. Normally, when you borrow a mortgage and don’t have 20 percent of the total amount of the purchase price for a down payment, lenders will require you to take out private mortgage insurance. Of course, some companies have exceptions to this rule, but most lenders require private mortgage insurance so the lender gets paid if a borrower defaults on a mortgage. Usually, private mortgage insurance costs borrowers a few hundred dollars a month, but the amount varies. Since most millennials (including myself) cannot cough up a 20 percent down payment to purchase a home due to the burdens of student loans, it is likely that many student loan borrowers will need private mortgage insurance.
However, if a borrower pays off enough of their mortgage, which including the down payment exceeds 20 percent of the purchase price, private mortgage insurance is usually no longer required. Typically, you need to submit an application with the lender to eliminate private mortgage insurance, and a lender may conduct an appraisal to ensure the property is not valued less than it was when the mortgage was originated. In any case, for many student loan borrowers, reaching that 20 percent threshold is within sight, and it can oftentimes be achieved within a few years. Since reaching that threshold could eliminate a burdensome monthly expense, it is sometimes a good idea to focus on paying off this amount of a mortgage before paying off certain student loans. Of course, once this 20 percent threshold is met, and no more private mortgage insurance is needed, one can continue to devote extra cash to student loans rather than a mortgage for all of the reasons noted above.
For most other kinds of loans, you should pay off the debt with the highest interest rates first. As mentioned in a prior article, the only wrinkle to this strategy is if you intend to borrow money for another purpose and need to minimize the total monthly amount you devote to debt. If this is the case, it might be worth it to completely pay off smaller car loans, medical loans, or other debts, since the total amount you devote each month to debt will impact your ability to borrow more money. If you are not looking to borrow money for any other reason, you can just pay off the debt with the highest interest rates first.
Of course, not every strategy noted about will work for all student loan borrowers. Everyone has vastly different debt profiles, goals, and other circumstances that will influence which repayment strategy works best. However, by following the strategies noted above, you will be able to determine which debts you should pay off first.