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I was hoping to get some advice on paying down a student loan. I have read other posts and this question has been touched on but I wanted to make sure I understood this correctly.
I have two loans, one is $175k @ 6% and another is $50k @ 7%. I am meeting minimum payments but wanted to make extra payments to pay down the loans quicker. My question is where should I spend the extra payments?
Everything I am reading is suggesting that I should pay off the loan with a higher interest rate first and then pay the other. However, I have played around with some amortization calculators and I feel like this is incorrect in my situation as the actual monetary amount of interest will be the most on the larger loan given the size of the principal relative to the smaller loan.
Therefore, if I focus on paying the smaller loan first the larger loan will go on for longer and the total monetary amount of interest I end up paying is greater.
Am I missing something or am I correct to pay down the larger loan first until I can balance out the outstanding balance, then switch to focus on paying down the higher interest loan.
Yes, you are missing something. If you pay the $175k loan off, your $50k loan will continue to cost you a lot of interest while you are doing so. If you attack the $50k loan first, you'll get rid of it more quickly, so all your debt will then be costing you only 6%, rather than some being 7%.
You also might want to consider if all of the debt is federal loans, or is some private? If some of it is private I'd focus there first, since they are less flexible loans (no IBR, etc.)
Definitely pay off the higher interest loan first with any extra payment. But check with your lender to make sure that your extra payment is applied against your principal right away. I have read that some lenders would apply the extra payment to your future scheduled installment payments instead. This is not a fair practice and you don't want that.
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