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Author: MyLabRuby Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 308722  
Subject: Which to pay down? Date: 7/14/2005 5:41 PM
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Got a statement from my student loan provider today - interest rates going from 4% to 6%, turning them into my highest rate loan, other than my vehicle. My question (my first since becoming an official fool) is this. Which to pay off first?

I have:
$7,000 in student loans, which will now be at 6%. These have the option of being deferred should I go back to college or something like that, which I don't plan on doing for a while.

$13,000 on a Citibank card, $11,000 at 1.99% and $1,700 at 16.24%. The 1.99% was a GREAT balance transfer deal (fixed rate until they're paid off, but then we had to put some regular charges on the card and unfortunately, can't touch the higher rate balance until the 1.99% is paid off, which makes this more like a 4% loan, I think, when I average it all out. Still not bad, but I hate having that 1,700 sitting there; I'm thinking about trying to transfer this to a different card if I can find a good balance transfer offer, but I'd have to do it all at once, which means I'd lose the 1.99% deal as well.

$22,000 at 6.5% on a secured vehicle loan - I'm paying this off quickly enough that I don't think I'll be upside down on the vehicle.

And then there's the mortgage. Cheapest interest, plus it's deductable.

So my question is, am I right in thinking if I had $5,000 sitting around to put somewhere, it would be best to put it toward the student loans, since they are the highest interest rate, besides the secured loans on the vehicle & home?

What I have available is that $5K in cash, $12K more on the Citibank card (which I have another fixed rate balance transfer offer on at 4%), $25K in a home equity line I'm not using (6-7% or something, I think), and $10K on a DiscoverCard. Also have an IRA I'm contributing to and an ING saving account (3%) that I want to slowly build up, but feel paying off debt at 6% is a little more important than saving a bunch at 3% right now.

As I said, this is my first post here, and hopefully will confirm some of the strategies I have and maybe see how others have handled issues like these.

Thanks!
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Author: WotPeed Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 208319 of 308722
Subject: Re: Which to pay down? Date: 7/14/2005 5:47 PM
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Personally I'd pay off the student loan since the $5k you're talking about will almost wipe that debt off completely. I'd finish paying the remaining $2k, then start on the car loan.

However, there might be some tax incentives to paying down the car loan first. I don't know anything about student loans but if they get preferential tax treatment, like mortgages do, then it would make sense to pay that off after the car's taken care of.

But if that $5k is all of your savings I'd keep some of it in the bank. Paying down debt is good but you do want to keep at least a little cash in your account in case of emergency.

Wot


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Author: Bweaver Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 208324 of 308722
Subject: Re: Which to pay down? Date: 7/14/2005 8:02 PM
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So my question is, am I right in thinking if I had $5,000 sitting around to put somewhere, it would be best to put it toward the student loans, since they are the highest interest rate, besides the secured loans on the vehicle & home?

I see the biggest risk in your debts as the risk of interest rate adjustment for whatever reason by the Citibank folks. I'd attack that first. It's not your highest rate, but circumstances beyond your control might result in interest rate increases.

Good luck,

Bruce

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Author: Leia28 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 208332 of 308722
Subject: Re: Which to pay down? Date: 7/14/2005 9:57 PM
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This may be a dumb question, but have you tried consolidating your loans at a lower or a fixed interest rate?

Also, the interest on your student loans may be deductible. If it is, you may not want to pay those down first.

-Leia

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Author: jtsheldon Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 208337 of 308722
Subject: Re: Which to pay down? Date: 7/14/2005 11:33 PM
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Place the $5000.00 against the car loan, the student loand and mortgage loan is tax deductible.

Go to www.adp.com and redistribute your federal withholding. If you received a big refund from the IRS you have too much withholding.

With student loans plus RE Tax and Mortgage Interest as your deduction you can lower the amount you pay in Federal withholding. The extra money you have, put against your car loan...remember your car depreciates almost 20% the minute you drive it off the lot...

Try to shop around and take the Citibank card balance to a 0.00 rate for one year, then switch to another after the next year...etc until that is managable.

Pay the minimum for student loans....

My two cents...

Jeff

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Author: WBuffettJr Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 208349 of 308722
Subject: Re: Which to pay down? Date: 7/15/2005 10:08 AM
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May I ask why your student loans are so high? These are the lowest interest rates we've ever had. I just consolidated mine two weeks ago and stuck them at around 2.78%, and they will knock off another .25% if I have them automatically paid from my checking account each month. If you can consolidate, I would do it right away -- it will save you thousands of dollars.

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Author: Lothar61 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 208350 of 308722
Subject: Re: Which to pay down? Date: 7/15/2005 10:09 AM
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Check your figures, your student loan interest could be tax deductible but it has income phaseouts. I believe you start loosing some of the deduction around $50,000 agi for a single filer.

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Author: DBAVelvet74 Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 208352 of 308722
Subject: Re: Which to pay down? Date: 7/15/2005 10:14 AM
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The 1.99% was a GREAT balance transfer deal (fixed rate until they're paid off, but then we had to put some regular charges on the card and unfortunately, can't touch the higher rate balance until the 1.99% is paid off,

That is why I always recommend having one card that does not have a special BT rate going.

Should you have to use a card you do not want to use that card.

(I know you know this, just saying for any lurkers who don't)

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Author: OtherVoices Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 208356 of 308722
Subject: Re: Which to pay down? Date: 7/15/2005 12:07 PM
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May I ask why your student loans are so high? These are the lowest interest rates we've ever had. I just consolidated mine two weeks ago and stuck them at around 2.78%, and they will knock off another .25% if I have them automatically paid from my checking account each month. If you can consolidate, I would do it right away -- it will save you thousands of dollars.

Rates went up on July 1st. If you didn't consolidate before then, you're out of luck. I'm also pretty sure that you have to have at least $7500 in student loans in order to qualify. So, it looks like the OP wouldn't have been able to consolidate anyway.

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Author: WBuffettJr Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 208358 of 308722
Subject: Re: Which to pay down? Date: 7/15/2005 12:27 PM
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I don't believe you are out of luck if you didn't do it by July 1. Rates went up, but they didn't jump from 2.83% to 7% as far as I know. You may have a point with the $7,500 minimum however, I was unaware of this.

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Author: MissMemphisBelle Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 208359 of 308722
Subject: Re: Which to pay down? Date: 7/15/2005 12:30 PM
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I don't believe you are out of luck if you didn't do it by July 1. Rates went up, but they didn't jump from 2.83% to 7% as far as I know. You may have a point with the $7,500 minimum however, I was unaware of this.


Mine went from 3.1 to 5.5, I believe.

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Author: exeter17 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 208360 of 308722
Subject: Re: Which to pay down? Date: 7/15/2005 12:50 PM
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If you already consolidate you can;t consolidate again.


Ex17

Cons in 2000 at 7.75 and paid it off in a bad mood 2 years ago b/c I was sick of everyone else having low low (2% rates).

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Author: Booa Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 208364 of 308722
Subject: Re: Which to pay down? Date: 7/15/2005 1:39 PM
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If your student loan rates are going up, you can consolidate them to get a fixed rate. I would do that regardless of what else you plan to do. You can consolidate, and there are special things about student loans that you should probably take into consideration before you pay them off--I'd go to the Paying Back Student loans board here on the Fool, and listen to whatever W505a tells you. But you can consolidate, and I think you should. Interest rates are only going to go up for a while.

Now, how secure is your job? Do you have an efund? Do you have cash flow issues? I ask these things 'cause they affect what you will want to do.

If you throw the $5K at the car, you will have the same size payment every month, just for fewer months. That could be all right. Throwing the $5K at Citibank will probably lower your minimum payment by about $100 a month. If you have cash flow issues, or if they come up, that would be a good thing, if you could only pay the minimums for a while.

Since you have $1700 trapped under your $11K on your Citibank, I'd be in a huge fever to pay it off, the interest rate on your $1700 can go up anytime Citibank wants it to. If you put the $5K towards the Citibank, you could use a BT to Discover for the remaining $8K, and then either wait and see if Citi made you a better offer than 4% fixed for life, or just take the 4% offer you have now. Fixed interest rate for the life of the loan is a good thing in CCs, and 4% isn't bad.

Are you going to keep this car? How much longer are you going to be paying on it? It sounds pretty new--are you sure you're not upside down on it? I'd actually check that, through www.edmunds.com, and if you are upside down, either gap insurance or putting the $5K towards the car might be a good thing to do.

Really, these are all just things to consider. You're the only one with enough information about your situation to make a good decision. I don't know what I'd do in your situation, to be honest, other than sell the $22K car and buy a used one in the $3-6K range. I would probably plunk the $5K down in my emergency fund and do my best to forget it existed, and I'd be shopping around for a BT like a lunatic, to get the Citibank onto one rate, fixed, for the life of the balance. And then snowball wherever I transferred the Citibank balance like mad. :-)

Good luck, hope any of this helped. Seriously, consolidate that student loan and read about it before you pay it off. You can defer payment on it if you are unemployed, you can switch payment plans so that your payment is smaller (or even 0), any balance you owe after 25 or 30 years (I forget which) is forgiven, all kinds of good stuff.


--Booa

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Author: bleplatt Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 208374 of 308722
Subject: Re: Which to pay down? Date: 7/15/2005 6:19 PM
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Student loan rates are consolidated at a weighted average: if the loans are old and large (as mine were), consolidating doesn't help you lower your interest rate.

Low interest rates only help those who actually took out loans during the low interest rate periods and those who have variable interest rates. A significant portion of people took out fixed interest rate loans and can't get better deals.

Additionally, once you have consolidated, it's all over for you, unless you have other loans with other lenders.

b

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Author: MyLabRuby Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 208390 of 308722
Subject: Re: Which to pay down? Date: 7/15/2005 10:20 PM
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Thanks everyone for your replies - here's what I think I'm going to do:

Switch all of the citibank (12K) to a Chase BT offer- 0% APR w/no fees for 18 months; hopefully citibank will give me another good balance transfer deal before that expires.

I checked into consoldating the student loans - like others mentioned, they just went up, and there is a minimum. The # I gave is actually for me and my wife combined, and I think you have to consolidate individually. Regardless... the interest is still deductable.

I think I'll apply the $5K to the vehicle payment, since it's one of the higher rates and also non-deductable on taxes. The 5K cash is not from taxes, but rather something of a bonus from the company I own; it's been a very good year. The vehicle is a 2002 $45K truck that I bought one year old for $33K; it was still easily worth around $26-30K last time I checked the wholesale/trade in value. Hopefully my 500+ per month will keep knocking that down fast enough; if not, I'm still planning on keeping it for at least 5-6 years.

Thanks again, I'll be sure to keep on checking out these boards - very useful information!

Chet


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