Looking for advice - Paying a Loan v. Paying Loan Interest

[kaitlyn224]

Since COVID hit I (27F) have moved back in with my parents because I’m currently a student. My parents aren’t rich but they don’t ask me to contribute financially because they know that I have debts (student loans and credit card) to focus on. Because of this I’ve been able to start knocking out debt and it’s gotten me thinking about working to start chipping away at some of my undergrad loans, which is what brings me here.

I’m a law student and I’ve made a decent amount of money this summer that I’d like to use to pay down some debt but I’m not sure which route is best:

Option 1: I have a Perkins loan that has been in educational deferment the past 2 years and no interest has accrued. I could absolutely pay $5k loan off and still have money left over from my summer pay to do what I want l.

Option 2: I have some loans with Sallie Mae that have accrued interest over the last two years since I didn’t have income to keep paying them the way I did in the 3 years immediately after I graduated from college. One of these loans has accrued around $5k in interest. I could pay that off but likely won’t really be able to get I to the principle and would end up spending the next year just trying to hold the I Teresa close to $0 until I start working Fall 2021.

This might seem like an obvious answer to some of you guys, but which should I use my $5k on? I feel as if I pay the interest in the Sallie Mae loan I’ll end up wasting money over the next year just keeping the interest down but I’m no finance wiz so I wanted to come here for some advice. TYIA!

 

[love4him1978]

@kaitlyn224 Pay off the Perkins loan and be done with it, then you only have the one large loan to deal with. Will be easier to deal with mentally, and the payment you would have made to it can grouped in to speed up the payoff of the loan leftover.

 

[kaitlyn224]

@love4him1978 This was my natural inclination and I guess it’s a snowball approach rather than an avalanche but you’re right, mentally I’d feel much more accomplished just knocking out the smaller one first

 

[love4him1978]

@kaitlyn224 Snowball, or avalanche, they're both just guides to get you out of debt, neither one is wrong and both will get you there. Which one feels right? In this case getting that whole one done and gone will be a relief, and allow you to focus your energies. By having one target, the marathon of dealing with the big loan. Stick to your budget, and if your attorney position doesn't come through in the fall, know that it will happen, get that part-time gig, and keep on the grind. Good luck

 

[michae1]

@kaitlyn224 Two ways to look at it - pay down the debt first generating the largest interest in dollar terms or pay down debt with the highest interest rate. My preference is generally highest interest rate, but everyone and their situation is a little different, I want to be as efficient with each dollar as possible when repaying debt, so highest interest rate should be paid first.

 

[kaitlyn224]

@michae1 I agree with efficiency and what’s what I guess is making me struggle. It may very well be my lack of knowledge of how things work but does it actually make sense to pay down interest on a loan if then I’d spend a year just trying to hold off the interest v. Just completely wiping out an entire loan? I’m genuinely asking. Because since I’m not going to be working come fall I can’t make any substantial payments to the Sallie Mae loans like I did when I worked full time (used to pay $866 and over 3 years I knock them down) but now the most I’d be able to pay into them monthly would be $140. With knowledge of that information would you still say to go for the Sallie Mae due to the high interest?

 

[michae1]

@kaitlyn224 Generally speaking - if you are making all of your minimum payments on all debt every month, and you then want to know where to spend your next dollar on debt so it is spent most efficiently, you would choose the highest interest rate 100% of the time.

 

[49erjoe]

@kaitlyn224 You mentioned having credit card debt. I would pay that off first.

 

[kaitlyn224]

@49erjoe I’ve already gotten that down which is why it wasn’t presented as a part of this. I’m focused on the student loan debt payment options at this time.

 

[49erjoe]

@kaitlyn224 In my opinion, until your credit card debt is zero, it should be your first priority since the interest rate will be much higher than any student loans.

 

[kaitlyn224]

@49erjoe Again, I’ve already handled the credit card and it is not relevant to this question whatsoever lol please just respond to the question asked