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I am looking for some advice about the order in which we should focus on paying off our debt and I have lurked on this board in the past to come up with ideas on how to do all the things in life we would like to do and always keep our heads well above water. But this economic climate makes me very nervous. I feel as if I cannot predict which path would be the best for us to go!
My husband has 2 different student loans. One is at 4.5% and is around 20k. The second is Department of Education, also 4.5% and 5k. He recently started taking courses and both loan companies (without our knowledge or permission) placed the loans in deferment. We had this on automatic payment (them pulling from our bank account). Now, the 5k loan earns no interest while deferred - GREAT! the 20k does, but it's very low! In fact, this year we didn't even reach the total amount of interest we could claim on our taxes. These had been at 7% for years!
So! My question is, how should we go about paying these down over this period. Our income is not changing. We had payed 226/month on the big one and 50/month on the little one. I am looking to get these paid off as soon as possible. We have a large bill that will be paid off as of June that was 500/month or more. So I will definitely have extra money to put towards these. These are variable rates.
Should I structure to pay off the 5k with full amounts that we can afford for the duration and let the 20k sit until the 5k is gone? Or should I pay interest earned on the 20k? The 5k is deferred until 2010 now, so should I structure payments to pay off before the deferment is up and then pay the other max I can on the 20k???
I would figure out how much you need to pay on the 5k each month to get it paid off just before it comes out of deferrment and anything leftover goes to the other one and everything after the 5k is gone.
I'm currently reading "Total Money Makeover" by Dave Ramsey (if you don't have the time start reading at page 102 and the next couple chapters will outline how and why).
But he says in order for you to feel it and be succesful, ignore the intrest rate and snowball your payments in order of your least expensive bill to your most... That means
pay minimum payments on the two loans and use the rest of your money to pay off your big bill (the one that will be paid off in june). When that is paid off take every dime you're paying on that bill a month towards your 5K loan, while still making minimim payments on the other loan. When that's paid off you can take all that money and put it towards the 20K loan.
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