By now, you have made a balance sheet for yourself that includes all of your assets and liabilities. Also, you have established the framework for your tangible goals and when you want to achieve them. Here are a few basic ideas to consider in determining your priorities:
- In general, look to pay off consumer debts with the highest interest rate and lowest balance first.
- Specifically, eliminate consumer debts including credit cards, car loans, and student loans. None of these are tax deductible as mortgages or HELOCs are (assuming an AGI of over $130,000 for married folks).
- If possible, move consumer debts to tax deductible debt such as a mortgage, assuming you feel comfortable with your income on a go-forward basis.
- If there is a 3 percent difference or more in interest rates, go after the largest interest rates.
- If there is a difference of less than 3 percent, and five years or less to maturity, consider paying off the loan with the lowest balance.
- Besides making sure you meet minimum payments, put any “above-and-beyond” payments of additional principal all toward only one loan so you can demolish it quickly.
Let’s take action to customize these ideas to your specific situation. The next logical step we need to take is reviewing the data from previous exercises and considering the prioritization of liabilities.
IBR COMPARED WITH PER
Review what I discussed to either defer your loan without starting payments immediately (interest will compound) or forbear the loan through an income-sensitive plan such as IBR or a pay-as- you-earn repayment plan such as PER.
IBR and PER are both great loan forgiveness programs. PER requires you to pay less than IBR on a monthly basis and may be a better fit for your situation.
LOWER YOUR PAYMENT
Sign up for an auto-withdrawal if the lender offers a slight inter- est-rate deduction.
Are you a year or two from entering full-time practice? As we discussed earlier, consider debt-forgiveness programs that are available through potential employers, federal, or state sources.
Material discussed is meant to provide general information and it is not to be construed as specific investment, tax, or legal advice. Individual needs vary & require consideration of your unique objectives & financial situation.
Please consult with your accountant or tax advisor for specific guidance."