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The Best Loans to Pay Down First

Focus on wiping out credit-card and consumer debt first.

I’ve just started graduate school, and my grandmother plans to give me money to help with my expenses. Should I use the money to pay down my undergraduate student loans or put it toward my car loan? I’m paying 5.9% on the car loan and have about $11,000 left on my undergraduate loans, at 6.3%. --D.M., Philadelphia

See Also: Don't Stress Over Student Loans

If you have any high-interest credit card debt, use the money for that first. Building an emergency fund should be your second priority. The car loan would be next on your debt-reduction to-do list. Even though the student-loan rate is slightly higher than the rate on the car loan, car loans lack the tax breaks and flexible repayment programs available with federal student loans. You can defer your student-loan payments while you’re in grad school (and interest on subsidized undergraduate loans won’t accrue while you’re in school), and you may qualify for an income-based repayment program once you graduate, which reduces monthly payments.

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