Which debt to pay off first and why?

Question

I'm pondering a few different options about how to use my money right now. One option is to invest in another rental property. The other option is to focus solely on paying down debt. For the purposes of this thread, let's focus only on the 2nd option please.

Currently, I have the following 2 debts:

$188,000 - Mortgage - 4.5% - It should be noted that I took a hit with the market down-turn and the home currently valued at around $160k. This house is currently rented and is breaking even (no significant monthly gain/loss).

$110,000 - Student Loans - 3.375%

Which would you focus on first and why? I'm currently able to funnel a decent amount of money at either. I've had really good luck with Dave Ramsey's "snowball" approach so I'm leaning toward the student loans. Thoughts?

Aaron Mazzrillo · Answer

I say don't pay off either. If you learn how to manager your money, those are some pretty low interest rate loans. By paying them off, you are investing you money at 3.375-4.5%. You can get much better returns in real estate. Even if you had that amount in cash, you could easily lend it out at 10-12% to other investors and use the income stream to pay down the principal balances. Put your money to work and use the return to pay down the lower interest rate loans without sacrificing your working capital.

Jerry W. · Answer

From a legal standpoint pay down the student loans. If you lose your job and tenants move out, in a worst case scenario you can declare bankruptcy and wipe out the house debt, you cannot wipe out the student loans if they were government insured. The term is nondischargeable. Even though I cannot spell it.

Ali Boone · Answer

I wouldn't pay off either. I would buy another rental property! Prices are only going up right now, so everything will continue to get more expensive, and you can use the profits from that to work on those other two if you want.

Joe Harper · Answer

Like Aaron and Jeffrey indicate, you could just let the Loan ride, for the time being. As someone who did the Dave Ramsey method for many years, I want to say that one size does not fit all. There are individual circumstances that dictate a modified snowball, and more importantly historical pricing anomalies that must be exploited. If I woke up in your shoes, I would bank as much cash as I could and go get as many income-producing assets as possible. Think about the time value of money. The assets are producing 2014 dollars but you are repaying cheap 199x dollars. Dave Ramsey is a real estate guy and risk averse. He is a one trick pony. I wouldn't be where I am today if it weren't for him but if I had leveraged to the hilt in 2009 and 2010, I think I would be done and able to leave my W2 career. Instead I paid cash for the first one in 2011 ($42,000). I'm up to 10 now. Owe $400k and have $100k of my own cash and equity invested. So, it boils down to increasing the income side of your budget in an intelligent and low risk fashion, that you understand and enjoy. The fact that you are asking the question indicates that Ramsey's method just doesn't feel right at this time in your life. You have my permission to go get more assets!! Keep asking these types of questions !!

Duncan Taylor · Answer

Payoff the student loans. Those will follow you until they are paid off or you die and your estate is settled.

Jeffrey Charter · Answer

If this were me, I would focus on bringing in more income. Maybe if I had enough to payoff the entire debt, I would consider it. But if I didn't have another 100 grand I would lose the purchasing power of that money. Like Aaron said, you can put the money to work for you and get a greater return. Create enough income, and pay the debt off at a later time. 100k in school loans wow!!! Did you get a degree in Medicine?

Marcia Maynard · Answer

Yes. Definitely you need to pay off the student loan debt first. Can't be discharged in bankruptcy, as mentioned by Jerry. Also, depending on the terms of the student loans, could the interest rates change? Some do. Are they private or federal student loans, or both? Makes a difference. Good luck!

Jeff Pollack · Answer

If you are bent on paying off one or the other, definitely pay the student loan. Your tenant is paying off the mortgage on the property and you're paying it off with devalued money with the help of inflation. If the student loan is fixed rate it is will also be inflated away over time and I'd invest in another rental property (you'll presumably cash flow at better than 3.375%) and use the cash flow to pay off the student loan.

Jean Bolger · Answer

Yep, the student loan is the one I would work on. You can essentially be having the tenants pay down the other one for you :)

Pam R. · Answer

Pay off the student loans. As long as you can sit tight on that rental, tenants will eventually get it into an equity positive situation. (Obviously, this assumes you have money for repairs/expenses). So if you do nothing with the rental property - over time it will be worth something. It can become an asset. Your student loans will never be an asset. They are a constant liability, both in decades of monthly payments as well as impacting your debt-to-income ratio. Plus, it would take far longer to pay down that $188k vs the $110k. $110k in student loans is a heavy burden to bear. I imagine getting it out of your life would have a significant impact on your future financial opportunities. IMO Good luck Jonathan.