Advice on Paying Down Car Loan vs Student Loans

First, congratulations on eliminating your credit card debt! Tackling debt systematically is a significant milestone, and you're now in a great position to prioritize further. Let’s break down your situation:

1. Federal Student Loans: What Happens if You Die?

You're correct: federal student loans are discharged upon death and do not transfer to your spouse or children. This feature, combined with potential protections like income-driven repayment plans and deferment options, makes federal loans less risky compared to other debts. While their interest rates are similar to your car loan, their terms offer you flexibility that private debts don’t.

2. Car Loans: The Better Target

The 6.9% car loan is a better target for repayment over your student loans for the following reasons:

No protections: Unlike student loans, car loans don’t disappear if you pass away. Your family may be responsible for handling the loan or selling the car to pay it off.
Depreciating asset: Cars lose value over time, so paying down the loan faster reduces your financial exposure to an asset worth less than the loan balance.
Shorter term: Car loans are usually shorter than student loans, meaning paying it off early can free up cash flow faster.

The 1.9% car loan should stay as-is because its interest rate is so low, making it a cheap source of financing.

3. Your Mortgage

With a rate of 6.25%, your mortgage is a long-term expense, but it’s not a priority over your car or student loans. Mortgage debt typically has tax advantages (if you itemize deductions) and supports an appreciating asset. Paying it off early may only make sense once higher-interest debts are gone, and you’ve maxed out tax-advantaged investments.

4. Your Proposed Strategy

A “risk-adjusted” approach to pay off the 6.9% car loan before student loans makes sense in your case. Here’s a step-by-step suggestion:

Prioritize the 6.9% car loan: Focus extra payments here to eliminate the debt tied to a depreciating asset.
Next, target the highest-interest student loans: After the car loan is gone, apply the avalanche method (highest interest rate first) to your student loans to minimize total interest paid.
Consider your 1.9% car loan and mortgage last: Both have relatively low costs to carry and should only become priorities after all higher-interest debt is paid off.

5. Additional Considerations

Emergency fund: Ensure you maintain at least 3–6 months of expenses in a liquid account before aggressively paying down any debt.
Retirement contributions: If you’re not already contributing at least enough to get a full employer match in your 401(k) or equivalent, prioritize that.
Refinancing options: Explore refinancing your mortgage or student loans if you can secure a significantly lower interest rate, but beware of losing federal protections for student loans in a private refinance.

Summary

Paying off your 6.9% car loan first is a reasonable and balanced approach, especially considering the unique protections of federal student loans. Afterward, tackle your student loans starting with the highest interest rates. This method addresses both financial efficiency and risk management, giving you peace of mind and flexibility for the future.