About 2 weeks ago, I put up a post that has been my thinking for the past 2 months: Should I pay off my final student loan, or should I pay off my truck? I got some great comments, and many (including the seemingly scrooge-like red) asked for more information, so here it is. (If you’re looking for more on when/why I bought the truck, head here) I’ve already paid off the student loan that I had with nelnet, and I’m currently working on paying off the one I’ve got with the federal government. This debate is about my Great Lakes Loan and my Truck Loan.
In this corner we have….
Student Loan
- Monthly Payment: $156.38
- Amount going to Principal: ~$85-89 (This seems quite variable considering payment is made on same day every month, although it could have something to do with the number of days in the month)
- Amount going to Interest: ~$67-72
- Interest Rate: 6.55%
- Principal (as of this writing): $12,426.05
- Payoff Date (if only minimums are paid, estimated): 12/2019
and in the other corner….
Truck Loan
- Monthly Payment: $315.25
- Amount to Principal: $287-291
- Amount to Interest: $28-32
- Interest Rate: 1.9%
- Principal (as of this writing): $18,269.73
- Payoff Date (if only minimums are paid, estimated): 12/2015
In my old post, I mentioned that not only did I have to pay for the monthly payment on the truck, but I had other costs that would go down when ownership changed (insurance), which would lead to an increase in cash flow of approximately 500 (minimum payment + insurance). I got some great advice in the comments, like I mentioned earlier. Evan at My Journey to Millions noted that my student loan interest was tax deductible, while my truck interest was not, so it would be beneficial to hang on to this and get the most out of the deduction while working on other debt priorities. Joe at Retire by 40 suggested I get cheaper insurance (no can do, I’m a young male driving a car that I don’t own).
The current snowball amount fluctuates monthly depending on the number of hours at my second job and will decrease going into the holiday season (as opposed to increase like it did last year), but hopefully the loan can be paid off before I turn 26 in May (I’m not assuming I’ll get a tax refund this year). If that does happen, I’ll be able to start putting 1,500 (or more) to whatever loan I choose starting in (or around) May 2011. Payoff times for each loan (if the loan was the primary recipient of the snowball) are:
Student Loan: 7/8 Months (depending on other things) – This will actually be lower because I’ll be putting the money that I’ve saved in insurance to this as well, but I don’t know how much that will be yet.
Truck Loan: 10/11 Months (depending on other things)
One other thing to consider with the truck is that I put a lot of miles on (It’s going to be close to or more than 40k in the first year), and I’d like to have a nice gap between when I stop making payments on this buggy and buy a jalopy for my next vehicle. The miles are all highway, but when selling the vehicle, it doesn’t matter – high miles is high miles. There will also be increased maintenance costs when the vehicle gets older and normal wear and tear takes hold (I’m looking at you, water pump).
These don’t take into account me getting a pay increase of any sort (I’m not holding my breath), my situation changing and me driving less (once again, not counting on that either), or anything else that could lead to an increase in available cash. That being said I’m pleasantly surprised with these numbers. I didn’t realize that these terms were this short (considering I’ve been at this since July 2009)! I’m kind of excited by that.
As you can see from my November monthly review, I’ve chosen to pay off the truck first. While this isn’t the lowest amount left or the loan with the highest interest rate, it is the one that will put me in the greatest position to retire my other debt and increase my cash flow during that time. I’ll be glad when the title comes in the mail, that’s for sure!
As an aside, it seems many readers think I should go for the truck because of the cash flow.
What do you think? Which debt would you take on next if you were me?
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{ 9 comments… read them below or add one }
You know where I stand! Go for the Truck
I’m going for the truck – but thanks for noting the tax deductions. I just got into repayment mode last year (like oct/nov) and my deduction was only around 100, so it didnt really stick in my mind.
I would have done the same thing; actually – I’m sort of doing the same thing! Paying off your truck will free up $315 per month that you can then focus on putting towards your student loan debt. I also think that student loan debt is looked at differently on a credit report, so you’ll probably also see your credit score increase. And Evan at Journey to Millions also had a point, you can deduct your student loan interest. I think you made a good decision.
Littlehouse – Even though Its not the smallest, I still am leaning towards that it’s the right way to go. It will just free up such a high percentage of my monthly budget (20%), and the student loan will free up next to nothing compared to that. For me, the interest loan deduction isn’t a huge deal maker or breaker, it’s more of a side benefit. Also, my truck is only a year old, but has 36,000+ miles on it! Its resale value will be in the tank if I need to sell it for some currently unknown reason.
Pay down that truck and then attack that student loan. You will love having that extra three hundred a month to pay down other things.
I would pay of the student loan. For no other reason than the idea of student loans overwhelm me. I can’t focus on anything because all I focus on is my own student loans. I feel like I can’t even do half the things the financial gurus tell me to do (like save for retirement, make an emergency fund) because debt, mainly student loans, are constantly on my mind. So although my opinion is completely random, and entirely biased, I’d say you should go for the student loans.
Sometimes I agree cat, but in this case, I’m not all that worried about this student loan – for instance, its not asset backed and its a student loan so they are going to get the money either way. However if I lost my job and this was paid off and my truck was not, Eventually they’d take back my truck. They cant take back my brain – Well, at least I hope not.
Jeff!! Great point about them being able to take away the truck god forbid something happened. That’s something to think about that iw would have never realized and will consider when paying my own bills (if I acquire anything more than student loans)
While holding one loan in higher reguard isnt always the best idea, if you take out a loan on something they could take back from you (car, house) I tend to put those in higher priority. Once your house is paid off, no one can kick you out of it.
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