The Top Debt Payoff Strategies

One sign that the recession still isn’t behind us is the many who are still struggling with debt.

A recent study by TransUnion shows more people are choosing to pay back their credit cards, while at the same time delinquent on the mortgage, in order to maintain credit for living expenses. This is in contrast to behavior many experts would have expected — that secured debt would be a greater priority.

For many, it is a sad necessity. But, if you have some sort of financial footing with cash flow and are starting to tackle your debt, which should you pay first? Since not all debt is created equally, below are a few general guidelines:

  1. IRS, government, child support obligations. Don’t mess with the government. They can take your money, and more.
  2. Family loans. Personal loans and promises can destroy relationships. Make these a high priority item to repay.
  3. Mortgages. If you can help it, don’t lose your home. Unless the choice is food or the home, choose to place the mortgage high on your list.
  4. Car debt. You need your car. If you’re in trouble, consider downsizing options.
  5. Student loans. Though student loans are not discharged in bankruptcy, some loans can be deferred, or placed on lower payment schedules such as the Income Based Repayment plan.
  6. Credit card and other personal loan debt.

In all cases, initiate a conversation if you are struggling, and try to set up a payment plan if you can not pay what you owe in full.

Where to pay extra funds first?

This depends on a number of items, but in general, the numbers should stay the same, except the order of #3-6 which will depend heavily on the rates and loan balances.

If you have 25 percent or greater equity in the home and a low, locked-in mortgage, consider skipping the extra payments and go to the highest rate debt from #4-6, unless you have a variable rate mortgage.

Debt payment strategies

Strategies to paying off debt include the Dave Ramsey popularized debt snowball. The idea here is to take out low-balance bills first to gain small victories, eliminate a payment, and add those dollars from toward other debts.

Another strategy is to focus on anything with a higher rate, and also a variable rate first, as this will save you in interest costs over time.

Should I begin to save, or pay-off more debt?

Retirement savings (especially when you have an employer match), should be considered if you can be comfortable — meaning paying the minimum and then some — with your debt obligations. So long as you have a long-term outlook and growth strategy for your savings, manageable debt balances, and low, locked-in rates, consider tax-advantaged retirement saving alongside your debt payment strategy.

Originally published 2/22/10 at FPA’s All Things Financial Planning blog:

About the author

Robert Schmansky, CFP®

One Comment

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  • hi, I went to law school in mid 40s and became a licensed attorney. I’m now 59 and I owe $138,000 in student loan debt. It is the only significant debt I have. I also own a condo worth $320,000 and I owe $105,000. Interest on the student loan is 6.5%. My mortgage is at 5.75%. Because I can’t get any tax break for the student loans and because mortgage interest rates are at 4.8%, should I refinance my mortgage and wrap in my student loan? If I did it my mortgage would increase by $700 and my monthly payment on the student loan is $1000. So monthly I would save $300 and also get a tax right off. The flip side is I give up the ability to defer payment if I hit a rough spot financially.

    Looking forward to a response.

    Thanks for your help.

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