An Ohio man weighing how to spend a sizable bonus is getting a blunt piece of financial advice from Dave Ramsey: Stop the “stupidity” and pay off student loans first.
The caller to The Ramsey Show said he expects a $60,000 gross bonus (approximately $40,000 after taxes), and he and his wife currently hold around $50,000 in student loan debt.
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The couple has two mortgages: one with a remaining balance of $80,000 on a rental property (at 3.6%) and another with an outstanding balance of $240,000 on his primary residence (at roughly 7%). He already has a healthy cash cushion — about $50,000 in savings, half of which he considers emergency funds.
Rather than throw the bonus at the highest-interest debt (his 7% mortgage), he said he’s considering paying off the student loans, with 5% interest, first.
“You’ve got to get rid of the stupid student loans,” Ramsey said. “You’re not going to prosper as long as you keep those things around. This is not an investment strategy. This is stupidity, and you’ve got to clean it up.”
He then advised this sequence: finish paying off the student loans, then tackle the smaller mortgage balance and finally refinance the larger mortgage at a lower rate (1).
Why the student-loan payoff wins
Student-loan debt has a unique drag on finances.
The average federal student loan balance per borrower in the U.S. is approximately $39,075 (2).
Student loans accrue significant interest and can linger for decades if you only make minimum payments (3). While a 5% rate may seem moderate compared to today’s mortgage rates, the key is time and flexibility. Paying off student loans eliminates a monthly fixed cost and frees up cash flow.
Secondly, while the rental mortgage has a low rate (3.6%) and is arguably considered “good debt,” the primary mortgage carries a much higher 7% interest. On paper, you’d think that attacking the 7% mortgage first makes sense. But Ramsey argues that the student loans represent a personal liability.
“The shorter the period of time in which you’re going to pay off the debt, the less interest rates matter,” he said.
Thirdly, Ramsey pointed out that when debt is scheduled to disappear in a shorter period, the primary concerns become the cash flow and the time interval until they can be paid off completely, not the interest rates.
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Which is the best long-term move?
Paying off student debt first likely makes sense, but there are some nuances. Prioritizing student-loan payoff over a 7% mortgage is defensible, but the argument hinges on balancing three factors: interest cost, cash-flow flexibility, and personal goals.
- Interest cost: The 7 % mortgage is costly. If you apply the bonus to the mortgage, you’d reduce the amortization schedule and save on interest. However, the student-loan debt — although at a lower rate — may come with less favourable terms, such as fewer tax advantages and more impact on your credit score (4).
- Cash-flow flexibility & risk: Paying off loans boosts monthly available funds and reduces fixed obligations. That matters for renters, homeowners, those managing investment property risk, or those undergoing career transitions. Unexpected expenses are always a possibility for everyone. Student-loan payments can tie up funds for years, and clearing them unlocks options.
- Personal finance benefits: Many financial planning advisers emphasize attacking high-rate debt first. However, Ramsey considers the type of debt and the benefits of being debt-free (5) Many borrowers still pay student loans decades after graduation. Approximately 40% of students who graduated before 2013 are still paying off their student loans (6).
Deciding which debt to pay first
If you’re expecting a large bonus or windfall, here are a few guiding questions:
- What debts do you hold, and what are their rates/terms?
- Which obligations constrain your cash flow the most or carry the most stress?
- How long will it take you to pay each one off if you use the bonus, plus make extra payments?
- What would it feel like to remove one of these debts entirely?
- When a bonus hits your account, you might want to invest, save or buy something nice — but the order matters. Clearing the debt that holds you back the most — not just financially, but psychologically — will free up your money and free you to start thinking about your next financial goal.
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Article Sources
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
Ramsey Show Hightlights (1); Education Data (2); Ramsey Solutions(3); AP News (4); Ramsey Solutions (5); Ramsey Solutions (6)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.