I have 3 separate student loans with varying interest rates:
$2,380 at 4.66%
$5,500 at 4.29%
$7,000 at 4.29%
Interest compounds daily, and the loans are set to amortize over 10 years, with 12 payments per year. This comes out to roughly $156.24 per month for principal and interest.
If I can afford to pay $210 extra per month, what is the best way to allocate the extra funds to mitigate total accrued interest for all 3 loans?
By paying an extra dollar in each of the loans, you will be saving in interest 4.66, 4.29 and 4.29 cents from each of the loans giving a total of 13.24 in savings, if instead you had payed all 3 dollars into the first loan the savings will be of 13.98 instead. Clearly, every extra dollar should be paid to the loan with higher interest rate, until it is paid in full. This result does not depend on the outstanding debt. The argument is on where the extra dollar implies a higher marginal saving in interests.
After the first loan is paid in full, the other two have the same interest, so it is irrelevant how you allocate the \$210 of extra payments.