Which Debts Should I Pay Off First?

Cheryl and her husband have a student loan and a mortgage left to pay off. They make $15,000 a year because they own two small businesses which are quickly growing. Which one should they work on first?

QUESTION: Cheryl in Missouri and her husband have a student loan and a mortgage left to pay off. The student loan balance is $38,000. The mortgage balance is $39,000. They make $15,000 a year because they own two small businesses which are quickly growing. Which one should they work on first?

ANSWER: You have a serious income problem. You really can’t attack either one of these debts at that income level when you have kids. You are below the poverty level, so until you get your income altered, this is a hypothetical question.

Hypothetically, as soon as you get income, you pay off the student loan as fast as possible as part of Baby Step 2, just like we teach. That debt is not going to be sleeping as soon as you get enough money to start paying on either one of these. You said the repayment is income-based, and the only reason it’s dormant is because you are at poverty level. As soon as you get up out of poverty, it’s not going to be dormant anymore. That thing is going to grow teeth.

The second thing is that student loans are not bankruptable. The third thing is that your diploma does not go up in value like your house does, so you can’t sell it later to pay off the loan. Get rid of that student loan as fast as you can as soon as your income rises.

If you make $70,000 next year, I want that student loan gone in that calendar year. Get your income way up and then knock that thing out. You don’t want to keep it around. Until you get your income up, it doesn’t matter because you’re not going to pay on anything now. You are barely paying your house payment and not paying anything on the student loan. You are keeping the lights on and food on the table, barely.

Your $15,000 income is $1,250 a month. If you take your house payment, lights and water out of that, and then you put some clothing on the kids, you have no money—maybe $50 or something. Let’s not start talking about how this is going to be all right at $15,000. I’m not going to go there. You need to get this $15,000 to $70,000 as fast as you can with your small businesses. If that’s not working, go get a real job, because you guys are starving to death. Then you’ll be able to attach that student loan with a vengeance.

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