Should I pay off my student loans or my car first?
Does it make sense for me to focus on paying of my student loans first or focusing on my car loan? Or should I just make the established payment on both of them and save any additional money I have?
I tend to favor divide and conquer strategies when it comes to debt. That means choosing one loan to pay off, rather than both. The idea is that if you throw all of your efforts at paying off a single loan, you'll get at least one loan paid more quickly.
In this situation, I would favor paying off the car loan first. There are two reasons for this. One is that a student loan is typically a longer-term loan, and for a larger balance. Simply put, it would be harder to pay off the student loan first.
The second reason is that car loans typically have outsized payments. For example, while the payment on a $30,000 student loan might be $300 a month, the monthly payment on a $10,000 car loan might be $400. Eliminating the car loan means that you can get rid of a big payment more quickly.
Once the car loan is paid, you will free up the cash flow currently being paid on the car loan to apply toward the student loan debt. That will give you the strength of a higher monthly payment, as well as the elimination of at least one debt fairly quickly.
Now I've made an assumption that the student loan debt is higher than the car loan, since that is usually the case. But if the student loan is smaller, you may want to pay that off first, since it will be more doable. At least part of the debt payoff process is psychological, so paying off one debt quickly is empowering.
The best strategy for loans is often to compare interest rates and pay off the highest rate loan first. This saves you the most interest in the long run and keeps more money in your pocket. You can certainly pay the minimum payment, but if you do have extra cash to comfortably pay down the loans (again, highest rate first), I would highly recommend doing that over saving. In general, I don't think it's prudent to leverage personal debt in order to save or invest. Get rid of the debt first if you can, sleep better at night knowing that it's gone, and then work on your nest egg!
Answering this question is challenging without more information. However, it is important to consider the type and amount of student loans that you have. What are the interest rates for your student loans? Do you qualify for student loan forgiveness? With your income, are you able to deduct your student loan interest? What is the interest rate on your car? If the interest rates are low enough, it might be optimal for you to invest your excess cash flow. Wish I could give you a simple answer, however, there is so much to consider.
There are a couple things worth considering to help you answer this question:
1. Which loan is charging you the higher rate of interest? That should be a higher priority for any extra payments you may be able to make.
2. Student loan interest may be tax deductible, which could effectively lower the net interest paid for the student loan compared to the car loan. Once you calculate the after-tax interest rate for your student loan, compare that with your car loan and pay off the higher interest loan.
3. One scenario where it would make more sense to save is if you're participating in an employer's 401(k) program that matches your contributions. It would make sense to take advantage of any matching provisions as much as possible, since matched contributions are effectively giving you a 100% rate of return on your money. That rate of return will far exceed the interest costs for either your student loan or car loan, and would warrant you diverting more of your money toward saving, if it's available.