Most of the time, I think of our 4 debts (car, credit card, 2 student loans) kind of equally in my mind. They are debts and I want them paid off. If anything, I have a soft spot for the car debt more than anything else because the interest rate is the lowest and so much of my monthly payment goes to principal that it feels like my progress on that debt is very rapid.
I have student loan debt, well, my spouse and I both do, and I know that many people classify that as “good” debt, in that, it was used to further our education so that we could go on to earn more money. Our interest rates are not anywhere near as low as many more recent graduates who benefited from some major rate drops in the past few years. So in my brain I have been kind of lumping the student loans and the credit card together as “equally annoying”, or so I thought.
I wanted to look at what I would save in interest by transferring my credit card debt to a 0% for 12 months card vs transferring to a 2.99% fixed card in a more global sense, not just focusing on the credit card in isolation, but looking at my overall debt picture. Imagine my surprise when I did two calculations with the snowball calculator, both with interest order (so in the 2.99% scenario, my spouse’s student loan in the first to be attacked by snowballs) and the 2.99% scenario actually cost me about $400 less in interest than the 0% for 12 months scenario.
I did this calculation a few days ago and I have been mulling it over in my mind ever since. There are tax advantages to the student loan interest (in that I can deduct them from my income) that is not true of the credit card interest which I also need to take into account, but I am not sure that there would be more than a $400 tax advantage to paying off the debts credit card first vs student loan first. I did try to do a quick and dirty estimate to figure that out but there were too many pieces for me to sort out and my brain refused to compute it all. I did figure out that for the rest of this year, there would be virtually no difference from a tax perspective but next year, I would pay about $340 more in interest to my spouse’s student loan using the credit card first plan, which at the 25% tax bracket I’m guessing would save me a little over $80 in taxes. The difference grows in 2009 and I think I would end up paying over $600 more in interest to the student loan by paying the credit card first than I would if paying the student loan first. Saving maybe $150 on my taxes that year?
I may only save $400 in interest changing the order but the allocations for where my interest is coming from do shift significantly. I didn’t figure out the tax benefit in 2010 because my brain started to completely shut down comparing the scenarios and trying to adjust for where the accelerated repayments began and the difference between them, but I am convinced that there would still be a monetary benefit to paying off the student loan first in the 2.99% scenario when all is said and done. Albeit a smaller one than $400 over the life of the payments. Maybe $150. Maybe $100.
I think, for now, I am going to stay the course I already have planned for several reasons. First, this whole exercise made me realize that honestly, the credit card debt bothers me the most. And there is an emotional factor to addressing debt as well as the math/brain factor. Second, Sallie Mae makes it really annoying for me to repay faster. I have to send a separate payment that clearly says on it “apply to principal” and I think I have to mail it to them every time. There is nowhere online that I can specify that. If you don’t specify to go to principal they simply apply it to your next payment. Since they calculate interest daily I am not sure how that affects my repayment (as long as I keep paying them faster than scheduled) but I am guessing I will end up paying them more this way than if payments get applied directly to principal. Maybe? Another thing to figure out. If I send them money they need to put it somewhere, and since interest computes daily, there is nowhere for them to put it once they get it than the principal… maybe? Maybe they hold it and apply it to the interest accruing little by little? I don’t know. That doesn’t even make any sense, that can’t be it. Why they must vex me so I have no idea (other than it makes them money of course). Also, right now I need the emotional gratification of sending many small payments a month and watching my debt total shrink that way. I am at heart a fritterer after all.
Too much math for my brain this morning. But it all confirms that I hate credit card debt. Must remember this lesson in the future when I am free of debt and the credit card starts whispering sweet nothings in my ear.