Decisions like these are only easy if you can either comfortably afford to pay your debt n its entirety or if you have no choice but to scrape by on income-based repayment. But it’s highly unlikely that many of us can find ourselves in that kind of position.
So how should you decide which payments you should make? The upside to this predicament is that debts like student loans and mortgages are the “good kind of debts.” Paying them off helps achieve a better credit score, and will show to other lenders that you are reliable with your payments. This will make it easier for you to take out loans in the future for other big purchases.
INTEREST RATES OF YOUR DEBTS
Ensure that all of your high-interest debts are taken care of first. This will leave you with more money later to deal with the larger debts that take a longer time to pay off. It’s usually not the most ideal situation, and many people refrain from doing so, but it’s better in the long run. The interest rates on these “high” debts are not tax-deductible, so the beneficial return from low-interest debts is not attained.
The interest on mortgages are tax-deductible for everyone, but this phases out depending on how much your income is ($75,000 or over). Deductions on student loans are also capped at $2,500 each year. By knowing these values and taking into account your living expenses, you can determine paying off which debt will be more affordable for you in the long run.
RISKS OF ADJUSTING THE RATES
If you have an adjustable rate mortgage, then you run the risk that the interest rate, as well as the monthly payments will go way up when interest rates rise. You can either pay it off in total, or reduce the principle enough so that you can refinance will help you save more money to take care of the remaining balance of your student loan.
AMOUNT OWED ON EACH DEBT
It makes sense to take care of the smaller debts before trying to discharge the amount of a larger debt. If you have less on your student loans than you mortgage, then it makes sense to finish paying them off first before you tackle your mortgage even harder. The same goes for vice versa: if there are fewer payments left on your mortgage, then take care of it in its entirety first.
REPAYMENT FLEXIBILITY
Student loans are known for their flexibility on repayment. Most students are allowed to put their payments in forbearance or deferment, which is a delay of payments for a period of time. These are granted if a student has lost his job, has become disabled, or has decided to return to school. The interest rate will continue to accrue over time, but it still allows you a time period for not making payments. You can also choose to tie your payments to your income or use a graduated repayment schedule, if your lender will allow it.
Deciding on which to pay off first is a personal choice entirely, as people are in different financial situations. Living a life that is finally debt-free is not an impossibility, if you take the time to balance your affairs properly.
