If you carry both a mortgage and student loans, put extra payments toward whichever charges the higher rate after taxes, not the bigger balance. Skip federal loans you expect to have forgiven, since extra payments only shrink the forgiven amount, and leave a low-rate mortgage on its regular schedule.
The rule assumes your emergency fund is set and you already collect your full 401(k) match. From there, picture a 3% mortgage and a 6.5% student loan, whatever their balances. An extra $1,000 toward the student loan saves about $65 in interest the first year, against about $30 on the mortgage.
Taxes can shift that math, so compare after-tax rates. Student loan interest is deductible up to $2,500 a year without itemizing, though the deduction phases out at higher incomes. Mortgage interest cuts your taxes only if you itemize, and most filers take the standard deduction instead.
For interest you deduct, multiply the rate by 1 minus your tax bracket. With the full deduction in the 22% bracket, the student loan’s 6.5% drops to about 5.1% after taxes, still well above the mortgage. If your income is past the phase-out, or you pay more than $2,500 of student loan interest a year, extra payments save interest at the full rate.
Two loans are exceptions. The first is a federal loan headed for forgiveness. Public Service Loan Forgiveness cancels the balance left after 120 qualifying monthly payments, and income-driven plans can discharge what remains after 20 to 30 years. Every extra dollar you pay is one that would have been forgiven.
The second is a mortgage locked in at a low rate. Prepaying a 3% mortgage earns just 3%, so even when it’s your highest after-tax rate, keep paying it on schedule and save or invest the extra cash instead.
Private student loans lack the protections federal loans carry, such as payments tied to income and public service forgiveness, and some have variable rates that can climb. When one costs about the same as your mortgage after taxes, pay it off first.
Write down each loan’s rate, adjust it for the deductions you actually claim, cross off the exceptions, and send the extra cash to the highest rate left.
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