Would it make sense for me to pay off a loan with another?

You should pay off the loan with the higher interest rate first.

If you are only paying the minimum payment on the 8% loan, then you are most likely only paying off the interest along with a very small percentage of the principal (original amount borrowed).

If this is the case, then you are already paying 8% on the original loan, but are not paying an extra 4% on top of that if you let the second loan amount accumulate.

It would be best to try and consolidate the entire 8% loan into the 4% one. but if you don’t do this as one lump sum, then you are paying multiple interest rates.

if you can’t consolidate, then what you need to do is pay the minimum on the 4% for the balance that you currently have. And then pay as much as possible on the 8% loan out of your income to get that one paid off first. Once that one is gone, increase the amount you are paying on the 4% loan and pay that one off.

Fireside, good advice. john

@fireside I am not prepared to pay off the 8% because I am currently using it and will be for the next year or so of school. But my thought is to make small payments on the 4% one while I am using the 8%...does that make sense?

@JonnyCeltics – If you are still in school, then hopefully you have it set up so that you are not yet accruing interest until after you graduate. If that is the case, then yes it would work to pay off small amounts with the 4% loan because you would be paying down principal before interest.

Right, it would be principal. They are from undergrad, and yes, they are currently deferred…but it’d be nice to go at them when I can in case I am inable to in the future, and I am already getting ahead. But paying off loans with loans just feel so…I don’t know…American?

“But paying off loans with loans just feel so…I don’t know…American?”
Agreed, but at least it can be done smartly.

People swap higher interest loans for lower interest loans all the time.

Great question and equally great answers! This has helped me with my student loan ordeal. They really can be so confusing. Thank you!

I don’t understand your question. But you should pay off the highest loan the fastest. If you need money, borrow it at the lowest rate you can. In the stock market it’s called leveraging. You borrow money at 4% because you know you can make money in the market—say 8%. You pay off your loan and keep the 4%.

If you are talking about refinancing, you should do that, too. Always reduce your loan rate, if you can.

Although there may be some other circumstances that change the advice. If your loan is a student loan, and your interest is deferred, that’s a good loan to keep over a loan that is charging you interest now. Unless you are being charged interest on the student loan, and it is only payments that are deferred. Then we are back to paying off the loan with the highest interest rate first.

With college loans, you need to pay off the unsubsidized loans first, because you can defer the subsidized ones. Try to draw the maximum on the subsidized loans, and the minimum on the unsubsidized loans. Pare your living expenses down, bank whatever excess you can from the subsidized loans, and pay off the subsidized loans with the savings.

My daughter ended up with $32,000 of debt for two years of grad school – $24,000 in subsidized, $8,000 in unsubsidized. She had $6,000 saved up from the subsidized loans that she didn’t use. She took that money, paid off $6,000 of the $8,000 immediately, then cashed savings bonds from her grandparents, and paid off the rest of the unsubsidized, putting $2,000 on the subsidized loans. She works for a college, and can take classes for free. Because she’s considered a student, the subsidized loans are deferred. In the meantime, she took a part-time job on the weekends, solely as “loan payoff money.” A year out of grad school, she’s paid off $5,000 with the “loan payoff money” and $2,000 from her day job income. The $32,000 is now $15,000 in debt. At the rate she’s going, she will have it all paid off in less than 3 years.

The reason why she chose to do it this way is that there’s such a thing as Universal Default Clause, which was part of her unsubsidized loans. You can make all of your student loan payments on time, but if you’re late on any other payment, or a utility payment, and it gets reported, your rates may increase.

If you can get the second loan for a lower interest rate, it makes a lot of sense.