This is good practice for all of you budding financial advisors out there. My husband and I have 3 long-term debts: my Federal student loan which is only in my name, a car loan on which we have about 3 more years of payments left, and a year-old mortgage. The latter two are in both our names. We have no credit card debt and are DINKs. The interest rates/balances on the debts are: student loan 3%/ $7,000, car loan 6.99%/ about 9,000, and mortgage 7%/ about 197,000 (yes, I believe as first-time home buyers we got screwed on that interest rate at closing, but that’s water over the dam now). We have about 12,000 in savings, and we have a little over 20,000 equity in our house. Here’s the tricky part: this year, due to a layoff, our gross annual combined income was reduced from over 60,000/year to about 40,000 and we have applied for mortgage rate modification because of course at the moment we can’t qualify for traditional refinancing.
I know that it is generally best to repay the loan that has the highest interest rate first, but in our case I’m also taking into consideration that my husband needs to build up a credit history here in the U.S. (he’s from Europe and immigrated 4 years ago), and the only loan that we can pay off at the moment is the student loan. The student loan has the lowest balance and I’ve been carrying it the longest (11 years). I am inspired by the low balance on my student loan and the historically low interest rate and am tired of the student loan debt, so I’m tempted to pay it off right away. My husband and father suggest not paying it off now, because 1. we need as much as possible in our savings account for a sense of security and 2. we are more likely to be approved for our mortgage rate modification if we show as much debt as possible.

What do you recommend?
Thank you all so much for your input- I’ll just continue to make regular payments on the student loan and my husband will be delighted to know that he is right;)

A couple of things I should clarify though:

Mytakeonit- in a financial emergency, we would get help from my dad, so, although I would be hesitant to use a lot of our savings, we would have a backup plan. So everyone is probably wondering that if it’s so easy why not just have daddy pay off the loans? And the answer is because we have an agreement that he will help in a crisis caused by things beyond our control, but we want to try to handle things on our own if at all possible.

tiffgrif- I know what you mean, but I should mention that our car is a Subaru Forester, which really don’t depreciate very much..which is one of the reasons why we chose that make.

Thanks again!!

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