After paying off all exsisting credit card and car loans my debt now lies among my home equity loan at 5% and my student loan at 5%.
I have extra money to be paying these off each month above their minimum payments.
Question: Since both of these have interest that can be deducted from my taxable income at year end, which one should I be trying to pay off first?
I vote for the Home Equity Loan, because the Student Loan people are a little nicer about it if you have trouble paying later on. But I have no idea what I’m talking about, so don’t listen to me.
The amount of deductible interest on student loans decreases from year to year, and if you make over a certain amount of wages, you can’t deduct anything. (Unless the rules have changed since a few years ago - anyone know if they have?)
I’d say to pay off the student loans completely with the HE loan and then deduct all the interest.
Although this should hopefully never be a concern for you, also bear in mind that student loan debt is damn near impossible to discharge in bankruptcy, as it is basically a protected class of debt, whereas home equity debt is less so (although they’ll take your home if they have a lien on it).
I think one thing I would consider is the length of each loan, considering the higher payment. If one would be pretty short to the other, I think I might apply the higher payments to the shorter, to get that one completely paid just to get it out of my hair.
The general rule of thumb is, all else being equal, pay off the smallest debt first. Once that is paid off, take the money you were applying monthly to that debt and use it to pay on the larger one.
I’d vote against this idea in principle. It’s usually a bad idea to convert non-collateralized debt to collateralized.