Two reasons to pay off the debt. First the interest rate is absurdly high in today’s economy. Second, the interest is not deductible, AFAIK (am I wrong about this?) As for investing the money in stocks, the earnings on that are taxable. The “rent” you earn by paying off your mortgage is not. It is as simple as that.
People don’t realize how much they gain by buying a house to live in. First the untaxed rent. Second the long term increase in value, also mostly untaxed. Poorer people, who mostly rent, are denied these benefits and thereby are subsidizing the middle class home owners.
I still don’t see that. Especially since most debts can be paid down in part. If you have $X dollars to spare, low rate debt of $X and high rate debt of 2*$X, pay down half of the high rate one. If as in the this case the rate difference is almost 3%, don’t see how the logistical issue of still having to write two checks every period would outweigh that savings. Maybe if the difference in rates were small plus there was some other factor like the lower rate debt being harder to discharge in bankruptcy. Although here it’s other way around, higher rate one harder to discharge in bankruptcy.
One thing that might affect the decision is that I believe the OP doesn’t work a normal 9-5 job for an established company but instead operates his own discount grocery store. So his income might fluctuate more than a regular employee, and there might be more risk of the store failing (than, say, if he worked for Walmart).
In most circumstances, not only is student loan interest deductible, it’s “above-the-line” deductible, meaning you can deduct the interest without needing to itemize, so you get the benefit of the deduction for the student loan interest, and you can still take the standard deduction.
As many here have already said, pay down that 7% student loan. But, also, refinance your house to a fixed rate. Do it now, while rates are still pretty low. 2023 will be here sooner than you expect.
Hopefully you’re working at a place that has 401(k) matching, and you’re participating at the full matching rate. That is free money. And at your age if you keep investing you’ll have at least $2-3 million when you retire.
ETA: I now see what Dewey Finn said. The OP may have to find other suitable investment vehicles for his/her retirement.
A self-employed person can have a traditional IRA, a Roth IRA, and a self-administered 401K. With the 401K they can sock away $18K year from their “pay” and a further 25% (IIRC) percent of profits up to a max of (IIRC) $50K-ish. Plus a further $6K “catch-up” contribution if they’re over age 55 which the OP is not.
The IRA rules for self-employed is the same as for wage earners.
Another reason is that for a person willing to pay off debts early, it gives more money to do that. Like the OP said they have a extra $100/month, if you could use that to pay off a student loan fast, you may have now $150/month to pay off the next one.
So it is to gain more ‘extra’ income to put into debt relief or investment or savings.
It also puts one in a more stable financial position as they now own $50 less per month as fixed obligations. This as opposed as prepaying the bigger items which will still be owed each month, so more able to handle unexpected expenses.
this is Federal tax, I don’t know about state tax debts.
As long as we’re talking bankruptcy: if the OP considers doing something else with the money other than an immediate paydown of either loan, then it’s best to put it in a workplace retirement account such as a 401(k). Those cannot be touched by bankruptcy court or lawsuits. An IRA, on the other hand, can:
And, depending on where the OP lives and how much equity is involved, he could conceivably be forced to sell the house in case of bankruptcy. So if he’s living in a million dollar mansion, with 800K in equity, chances are he’d be forced to move and the equity is largely gone. That all depends on the individual state’s laws on homestead exemptions etc.
So, all that rambling: If bankruptcy protection is your current concern (which I doubt or you wouldn’t have 100 spare bucks a week :D) then my advice would be a combination of 401(k) (Roth contributions, if possible, 'cuz you can get at those in some circumstances) and paying down the student loan.
All else equal though: that 7% interest on the student loan is money you’re throwing away. If you have no other debt (aside from mortgage), and you’ll be in good shape to sort out that balloon mortgage in 5 years, then put a significant amount of the extra cash against the student loan.
I assume that he’s talking about state taxes, since as you note, and as I learned in school, federal taxes can be discharged in bankruptcy in certain circumstances.
