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Should I pay off my student loans or mortgage first?
Looking at the interest rates and tax benefits can help you decide.
Mortgages and student loans are both considered good debt — their interest rates are typically low and they’re seen as a form of investment. This is why you might want to focus on paying back your other debts first — we’re looking at you, credit cards. Then once you’re left with just a mortgage and student loans, looking at the interest rates and tax benefits can help you decide which to tackle first.
When should I pay off my mortgage first?
You might want to prioritize paying off your mortgage before making extra payments on your student loans in the following situations:
You have an adjustable-rate mortgage
An adjustable-rate mortgage means the amount you pay toward your mortgage may change frequently. Compared to a fixed-rate student loan with predictable monthly payments, you could wind up with an expensive mortgage if interest rates jump.
In this case, it may be better to put the majority of your expendable income toward your house — or at least pay it down enough so you can refinance to a standard fixed-rate mortgage.
You want to take full advantage of interest tax deduction
If you’re hoping to deduct as much interest as you can from your taxes, you might want to consider making extra payments on your mortgage rather than your student loans. That’s because the IRS caps the student loan interest tax deduction at $2,500 or less depending on your income.
Meanwhile, single individuals and couples filing separately can deduct interest on up to $375,000 of qualifying home loans. And couples filing jointly can deduct interest on up to $750,000. Because of this, you’ll likely be able to get a bigger tax break by prioritizing paying off your mortgage over your student loans. Just keep in mind that you have to itemize your deductions to claim your mortgage interest.
You qualify for student loan forgiveness
You won’t have to worry about the remainder of your student debt if you qualify for one of the federal forgiveness programs or a private loan repayment assistance program. If you’re on the path to student loan forgiveness, paying more toward your mortgage will help you save money in the long run.
Just make sure you understand the terms of the forgiveness program: As of June 2018, 99% of borrowers seeking Public Service Loan Forgiveness were rejected.
When should I pay off my student loans first?
Alternatively, you might want to make extra repayments on your student loans over your mortgage if any of the following ring true for you:
You have several private student loans — all with different rates
Juggling repayments on multiple private student loans — all with different interest rates — can be difficult to manage. Instead of making extra payments on your mortgage, you might want to focus on getting your student debt paid off. How you approach this is up to you.
One option is to use the debt avalanche method, which has you pay off your student loans in order of highest interest. This will help you save the most in the long run. Alternatively, you could use the debt snowball method, which has you focus on your smallest student loans first — ideal if you’re best motivated by little wins.
You’re getting pressure from your cosigner
If a parent or family member cosigned your student loans, they’re equally responsible for paying back your debt should you default. This means your student loans have raised their debt-to-income (DTI) ratio — a major factor lenders look at in deciding whether to approve you for a loan or credit card.
If you’re getting pressure to pay off your debt so your cosigner can apply for a car loan or mortgage, you might want to prioritize paying off your student loans as fast as possible.
You have a large student debt load and long term
The longer you spend paying off your student loans, the more you’ll spend on interest. This is especially true if you’re on an income-driven repayment plan or you chose a private student loan with a 20-year term. Since most lenders add any unpaid interest to your loan balance, you’ll essentially be paying interest on interest — causing your loan to grow larger over time.
This isn’t the case with mortgages, however, since regulations prevent lenders from charging too-low repayments that would cause interest to add up.
To save the most money on interest in the long run, it might make the most sense to prioritize paying off your student loans first before your mortgage.
4 steps to figure out which debts to pay off first
If you’re struggling to decide which debts to pay off first, here are a few steps that might be able to help:
- Consider the higher interest rate. In general, paying off your debts with the highest interest rates first can help you save the most money in the long run.
- Check the tax advantages. The IRS allows you to deduct interest paid on specific types of debt like student loans and mortgages — though how much depends on your income and tax regulations. Look into the tax benefits of each of your debts to see where you stand to save the most by making extra interest payments.
- Understand the risks. Secured debts like mortgages and car loans pose more risk should you default since the lender can repossess your property to recoup its losses. You might want to focus on making extra payments on those debts first rather than unsecured debts, like student loans and credit cards.
- Compare your repayment options. Consider how flexible your repayment options are with each type of debt. Federal student loans and some personal and car loan providers allow you to pause repayments if you hit a financial rough patch. In this case, focusing on paying off your debts with less-flexible repayment options might make more sense.
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Mortgages and student loans are generally considered good debt. And they’re usually hefty — the average borrower has tens of thousands of dollars in student loans and around $200,000 sunk into a mortgage.
Before you dive into making extra payments on either, make sure you’ve hit these four financial milestones first:
- Built an emergency fund
- Started a savings account for retirement
- Paid off high-interest credit card debt
- Paid off your car loan
Other ways to save on your student loans
Looking to save money on interest in the long run? Consider these tips for tackling your student debt:
- Refinance your private loans. If your credit has improved since you first took out your student loans, consider refinancing. You could potentially lower your rate and save thousands over the length of your loan term.
- Consider switching federal repayment plans. If you chose an extended repayment plan when you graduated college but can now afford higher monthly payments, switch repayment plans. A shorter term means less paid in interest — and more money in the bank.
- Make biweekly repayments. Dividing your monthly payment in half and paying that every two weeks will lead to one extra payment made each year. This is an easy way to pay off your debt faster without feeling the pinch on your wallet.
Compare student loan refinancing providers
Before paying extra on your student loans or mortgage, you should prioritize paying off your other debts, building an emergency fund and saving for retirement first. Then once that’s squared away, you can look at the interest rates, tax advantages and forgiveness options of your student loans and mortgage to figure out which to prioritize next.
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