Is it better to prioritize paying off student loans or a car loan?

It depends on your situation. Federal student loans offer flexible payment plans and the potential for debt forgiveness. That can make paying them off preferable over a car loan. But student loans probably won't go away with bankruptcy, which could put added pressure on an already dire financial situation. What's more, a car loan is backed by the vehicle itself. If you had to, you could sell the car to pay down the debt.

How do student loans differ from car loans?

Student loans can differ from car loans in several ways.Student loans have more flexible payment options or longer terms than car loans.Interest on student loans may be tax-deductible.Payments on student loans can be paused.Student loans are hard to remove in bankruptcy.Auto loans use the vehicle as collateral.

Can you use student loans for a car?

Student loans prohibit the use of funds for the purchase of a car. Although transportation expenses to and from school are approved, they only cover things like public transit fares, gasoline, and vehicle maintenance.

Student Loan vs. Auto Loan: Which to Prioritize?

Student Loan vs. Auto Loan: Which Should I Pay Off First?

By Adam Levy – Updated Sep 10, 2024 at 2:49 PM EST

Key Points

Pay down auto loans first due to lack of forbearance options and potential vehicle repossession.
Federal student loans offer income-based payments and possible loan forgiveness.
Interest on student loans may be tax deductible, adding a financial benefit.

Prioritizing student loans vs. auto loans is a challenge many young adults face when deciding to pay down debt. The decision isn't always obvious since federal student loans offer many different repayment options and the potential for debt forgiveness. Here's everything you should consider in your quest to get rid of your debt.

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Loan agreement with pen and calculator. — Image source: Getty Images.

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Some factors still favor paying down the student loan, though.

You can defer payments on the student loan if you return to school.
The interest paid may be tax-deductible.
If you declare bankruptcy, it'll be much more difficult to remove the student loan debt than the auto loan.

You should consider the likelihood of those events and the impact they could have on your finances. If you don't plan on returning to school and already have a steady career, paying down the loan with the higher interest rate will help you reach debt-free status sooner.

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Savings Account

A savings account is an account that earns interest with a financial institution.

Ultimately, it comes down to how much appetite you have for risk. If you're dead set on paying down your debt, use the above information to make an informed financial decision and start tackling your loans.

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Student debt vs. auto debt FAQs

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About the Author

Adam Levy is a contributing Motley Fool stock market analyst covering technology, consumer, and financial stocks and how policy, economic, and consumer trends shape personal finance, Social Security and retirement savings. Before The Motley Fool, Adam was a financial advisor at Edward Jones. He studied finance and electrical engineering at Carnegie Mellon University.

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