‘I am planning to split $15k between my Roth IRA and taxable investment account’: I have $77,895 in student loan debt. How should I allocate a large lump payment across 3 loans at 5.84-6.84% interest rates?

Background: So, Money Minder, I’ve got these 3 pesky federal student loans totaling $77,895. I recently inherited some cash and I’m thinking of throwing $12,000 – $15,000 at them. My current payments are $400 a month on an extended graduated plan. Oh, and I’m 34 years old if that helps. More details about my net worth at the end if you’re interested. By the way, I have no other debt, so that’s a plus!

Questions: Should I dump all the money on the loan with the highest balance/interest rate? Or should I split it up, focusing more on the high balance loan? Like maybe 10k on one, 2.5k on the other two? Or maybe divide it evenly, like 4.5k on each loan? Also, should I cut back on investing and put more towards the loans? For example, invest 5-10k in taxable investments and nothing in the Roth IRA? How would that change your answer to the first question?

Loan A: 6.21%, $25,187 balance (includes $133 accrued interest)

Loan B: 5.84%, $23,525 balance (includes $116 accrued interest)

Loan C: 6.84%, $29,183 balance (includes $230 accrued interest)

So, I’m planning to split the $15k between my Roth IRA and taxable investment account (both managed by Personal Advisor at JPMorgan), which will bring that portfolio up to $40k. I’ll probably follow the advisor’s suggestions on how to divide those deposits. The Roth IRA is not my top priority, if that helps.

Other details: I’m also stashing $35k in a High-Yield Savings Account for a future down payment, with a current APY of 5.3%. I’ve got a rollover IRA worth $58k. I’m on the job hunt right now, but when employed, I work as a healthcare consultant earning $110-135k including bonuses. No car payment or other debts to worry about. I’ve never been married and have no kids. I like to ‘set it and forget it’, so I just want to dump the cash in and move on.

Farewell, Money Minder! Hope to hear back soon.

Response from THE MONEY MINDER:

Hello There,

Congratulations on receiving an inheritance and taking the proactive steps to tackle your federal student loan debt. It’s great that you’re considering the best way to allocate the $12,000 – $15,000 towards your loans. Given your three loans with varying balances and interest rates, it makes sense to prioritize paying off the loan with the highest interest rate first.

In your case, Loan C with a 6.84% interest rate and $29,183 balance would be the logical choice. By allocating a larger portion of your inheritance towards this loan, you can reduce the overall interest you’ll pay in the long run. It’s important to work towards becoming debt-free, especially when you have the means to do so.

As for your investments, it’s wise to strike a balance between paying down debt and saving for the future. Considering your job market situation and priorities, you could consider adjusting your investment amounts. While it’s beneficial to contribute to your Roth IRA and taxable investment account, you might want to allocate a smaller portion towards investing and a larger portion towards your student loans.

Ultimately, it’s crucial to prioritize reducing your debt burden while also laying a solid financial foundation for your future. By taking a practical and realistic approach to managing your finances, you can achieve both short-term and long-term financial goals. Remember, every step towards financial freedom is a step in the right direction. All the best from THE MONEY MINDER.