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I have 4 student loans. Two are for roughly $5,000 - one at 4.5% and one at 5.6%. Two loans are for roughly $1,500 and both have an interest rate of 6.8%. Right now I have $1,000 I can put towards my loans - should I pay $500 to each of the higher interest loans (reducing them to $1,000 each) or $1000 towards one of the high interest loans (reducing one to $500 and the other stays at $1,500)?
I will continue to pay the interest on the other loans. What's my best option?
Thanks!
In my opinion, it generally makes sense to focus all of your debt-reduction energy and funds on one loan at a time.
There are two reasons for this:
It will allow you to more quickly move from 4 loans to 3 loans, and then 2, and then 1, providing you with a sense of progress and motivation.
As you reduce the number of loans that you have, your monthly minimum payment obligations will be reduced. Then, if you have a month with an emergency expense, you will have more income available to you for your emergency without getting behind on your loans.
There is debate about whether to pay loans in order of the loan balance or in order of interest rate (you can read about this here and here), but in your case, your highest interest loans also have the lowest balance, so either method would have you picking the same loans first.
You have already chosen, wisely, to start with the $1500, 6.8% loans. Send all of your $1000 to one of these loans, and continue to work aggressively to knock out all four as quickly as possible.
