Should you use tax refund money to repay student loans? The answer depends on what other kinds of debt you have as well as if your student loans are private or federal. Federal student loans have more options to postpone or reduce payments if you get into financial trouble than nearly any other type of loan. Thus, you want to pay off credit cards, mortgages, car loans, and private student loans first.
But what if part of your refund was due to education tax credits or the student loan interest deduction? You should still use the money to put yourself in a better financial position. For instance, putting the money in an emergency fund. If federal student loans are your only debt, your job is steady and you have at least a month of expenses in savings, then paying off your federal student loans could be a good option.
What if you have private student loan and credit card debt? Pay off the loan with the highest variable rates first. Variable rate loans may experience interest rate ups and downs with the economy. Thus, you take risk out of future payments by paying these off first. Then pay off your highest fixed rate loans. You can also pay off the loans with the smallest balance, no matter whether rates are fixed or variable. This way you can eliminate a payment from your budget.
Budgeting is always a personal decision. Think about your own situation before choosing a way to spend those refund dollars.
Reyna Gobel is the author of CliffsNotes Graduation Debt: How to Manage Student Loans and Live Your Life, Second Edition, and student loan expert for Wisebread's New Graduate Help Center.