A reader named Milan recently wrote in with the following question:
Here’s my situation:
Parent PLUS Loan – $9, 892 @ 7.75% APR (fixed)
Stafford Loan – $14, 252 @ 4.00% APR (fixed)
Private Loan – $24, 357 @ 7.72% APR (variable)
I have $10k right now that I can dump into one of these loans. Do I dump the $10k in the Parent Plus loan, and then snowball the amount I was paying on that loan into my private loan?
This is a great question. The Parent PLUS loan has a very slightly higher interest rate as compared to the private loan. However, the Parent PLUS interest rate is fixed, whereas the private loan has a variable rate. The other thing to consider here is that the $10k lump sum is just enough to kill off the Parent PLUS loan, whereas it would only knock the private loan down by about 40%.
Looking just at the interest rates, I’d be inclined to attack that variable rate loan first — it’s on par with the Parent PLUS loan, but you have significant upside risk. Given the current state of affairs, rates really can’t do anything other than climb (though it may be awhile before that happens). That being said, there’s definitely something attractive about killing off that Parent PLUS loan first.
Debt reduction guru Dave Ramsey would most likely say to go after them in reverse order of the balances, targeting the Parent PLUS loan, followed by the Stafford loan, and finally the private loan. But if it were me, I’d probably do exactly what Milan is suggesting — pay off the Parent PLUS loan first, then snowball the payments into that variable rate private loan, saving the 4.00% APR fixed rate Stafford loan for last.
What would you guys do if you were in his shoes?