| Debt Type | Rate | Asset Behavior | Verdict |
|---|---|---|---|
| Credit card | 18–28% | Depreciating (consumer goods) | Bad — pay off immediately |
| Auto loan | 5–12% | Depreciating (loses 20% year 1) | Acceptable if rate < 6% |
| Student loans | 4–8% (federal undergrad 2025-26: 6.39%; federal grad unsubsidized: 7.94%; PLUS: 8.94%) | Appreciating (earning potential) | Acceptable if degree boosts income — see federal repayment options below |
| Mortgage | 6–7.5% (2023-2026 range; floor 3% briefly in 2020-21) | Appreciating (real estate) | Usually good — interest deduction available ONLY if you itemize (post-TCJA: <12% of households do) |
| Business loan | Variable | Potentially appreciating | Good if ROI > cost of debt |
Federal student loans offer multiple repayment paths that private loans do not. The federal interest pause (COVID-era) ended in October 2023 — interest is accruing again on all federal loans. Verify current plan availability at studentaid.gov — court rulings and Department of Education guidance have changed details multiple times since 2023. Source: studentaid.gov/manage-loans/repayment/plans.
| Plan | Monthly Payment | Forgiveness | Interest Behavior |
|---|---|---|---|
| Standard 10-year | Fixed amortized payment (highest monthly amount) | No forgiveness path — fully repaid at end of term | Accrues normally; you pay the least total interest of any path |
| IDR (PAYE / IBR / SAVE) | 5-10% of discretionary income; lower than Standard for most borrowers | Balance forgiven after 20-25 years; forgiven amount is currently taxable income (verify IRS guidance — a temporary exclusion existed through 2025) | SAVE plan included a subsidized-interest waiver while in repayment (struck down by courts 2024-25; verify current plan status at studentaid.gov) |
| PSLF (Public Service) | Same as qualifying IDR plan while working at a qualifying employer | Remaining balance forgiven after 10 years (120 qualifying payments); PSLF forgiveness is currently tax-free (unlike standard IDR forgiveness) | Interest accrues normally; only Direct Loans qualify — FFEL loans must be consolidated first |
| Deferment / Forbearance | Payments paused temporarily | No forgiveness path — the clock stops; balance may grow | Subsidized loans: government may pay interest during deferment. Unsubsidized loans and forbearance: interest accrues and capitalizes — your balance grows while payments pause |
Paying off a credit card at 22% interest is a risk-free cost reduction equivalent to a 22% pre-tax return — the highest such reduction available in personal finance. Always pay off high-interest debt before investing (except for employer 401(k) match).
Sit with the ideas.
A new graduate has $30K student loans at 5%, $8K credit card debt at 21%, and a $60K salary with a 100% 401(k) match up to 3%. With $500/month extra, what's the optimal allocation?