Ranking common debts from bad to good
| 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 loan repayment options
Federal student loans offer repayment paths that private loans do not — and the menu changed structurally on July 1, 2026. A 2025 federal law replaced the old income-driven lineup: the SAVE plan has ended, and a single income-based option called the Repayment Assistance Plan (RAP) launched for Direct Loans. Which paths you can use now depends mainly on WHEN your first federal loan was taken out — the decision guide below walks through it. Details are still being implemented; verify your own options at studentaid.gov/manage-loans/repayment/plans before choosing.
Comparing federal repayment plans (as of July 2026)
| Plan | Monthly Payment | Forgiveness | Interest Behavior |
|---|---|---|---|
| Standard | Fixed amortized payment (highest monthly amount; term now scales with balance for new borrowers) | No forgiveness path — fully repaid at end of term | Accrues normally; you pay the least total interest of any path |
| RAP (new, from 2026-07-01) | 1–10% of your adjusted gross income by income bracket, minus $50 per dependent child; $10/month minimum | Balance forgiven after 30 years (360 qualifying payments); counts toward PSLF | Unpaid interest is waived each month — your balance never grows while you pay as agreed; small principal subsidy when the payment doesn’t cover it |
| IBR (existing borrowers only) | 10% of discretionary income (first loan on/after 2014-07-01) or 15% (before 2014-07-01) | Forgiveness after 20 years (post-2014 borrowers) or 25 years (pre-2014); forgiven amount may be federally taxable again from 2026 — the prior exclusion expired; verify current IRS guidance | Interest accrues normally; not open to borrowers whose first loan is on/after 2026-07-01 |
| PSLF (Public Service) | Same as your qualifying plan (IBR or RAP) while working full-time for a qualifying employer | Remaining balance forgiven after 10 years (120 qualifying payments); PSLF forgiveness is tax-free | 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 |
Which repayment path applies to you? A decision guide
Start with one question: when was your FIRST federal student loan taken out? That single date decides most of the menu below. Step through the branches — each Continue reveals the next situation.
Choosing a repayment plan by loan date
You have exactly two choices: the Standard plan or RAP. There is no other income-driven option. Rule of thumb: if the Standard payment fits your budget, it costs the least in total interest; if it doesn’t, RAP scales the payment to your income (1–10% of AGI, $10/month minimum) and waives unpaid interest so the balance never grows.
Those plans are being retired. You must move to IBR or RAP by July 1, 2028 — and if you do nothing, you will be moved automatically without choosing. Compare your IBR payment (10% or 15% of discretionary income, forgiveness at 20–25 years — including your years already banked) against RAP (AGI-based, 30-year clock) before the deadline; for many borrowers close to IBR forgiveness, switching restarts nothing but RAP’s longer clock still matters.
You can stay. IBR keeps its terms for existing borrowers (10%/20-year if your first loan was on/after July 1, 2014; 15%/25-year if earlier). Staying put is often right — but run the numbers once at studentaid.gov’s Loan Simulator, because RAP’s interest waiver can beat IBR when your payment doesn’t cover monthly interest.
Layer PSLF on top: 120 qualifying payments (10 years) while employed full-time by government or an eligible nonprofit forgives the rest, tax-free. Both IBR and RAP count. Certify your employment yearly — the #1 PSLF failure is paperwork, not eligibility.
Why paying off high-interest debt is a risk-free return
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. Pay off high-interest debt before investing (except for employer 401(k) match). One honest caveat: the math is only risk-free if your behavior cooperates — the guaranteed 22% assumes you do not re-borrow on the card you just paid off, and that the payoff is not draining the emergency fund you would need for the next surprise expense (which would push you right back onto the card at 22%).
Avalanche versus snowball payoff strategies
| Payoff Strategy | How It Works | Best For |
|---|---|---|
| Avalanche (highest rate first) | Pay minimums on all, extra $ to highest-rate debt | Mathematically optimal — saves the most money |
| Snowball (smallest balance first) | Pay minimums on all, extra $ to smallest balance | Psychologically motivating — quick wins build momentum |
List your debts by interest rate
Whether to invest or pay off a high-rate card first
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?