Samantha
“Dear Steve,
Hi Steve, You were already kind enough to answer one of my questions (re: out of control Private Student Loans) and am now hoping that you can help with a follow-up question.
I recently earned a decent-sized bonus at work that I’d like to throw towards some of my student loan debt. The amount is large enough to either completely wipe out one of my smaller loans that has a 7.75% interest rate, or to put a dent into one of the very large loans that carry a 9% interest rate. In your opinion, is it better to wipe out a small loan completely or to take a chunk out of a larger loan?
Thanks so much!
Samantha”
The Answer:
Dear Samantha,
The answer to your question is rooted in emotion, not logic. The logical answer is that the bigger bang is achieved by applying the money towards the higher interest rate debt. But for many people, myself included probably, I would get great emotional satisfaction in knocking off one loan completely.
If you then take the minimum payment that you were sending on the smaller loan and send it in addition on the bigger loan, that will help to pay the larger loan off faster.
If you don’t have any money is savings, you might want to withhold some of the bonus and start to build an emergency fund.
