Paying off Federal Student Loans vs. Private Student Loans vs. Down Payment on a House (pay, rent)
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So I've been contemplating looking for a house, as I'm tired of dealing with rents going through the roof here in Denver. The problem is, I have a relatively small down payment saved ($15k +/- a couple grand). So instead, I've been thinking about just going after my outstanding student loan debt.
I have two different types of loans. The first is private. I have a variable APR and it's currently at 2.75%. I currently owe about $11,000 on these and my monthly payment is about $137/mo. I just did my taxes for the year, and it amounted to about $415 of interest over the year. I have another loan that is a federal loan through the Dept. of Education. That loan rate is fixed at 6% and I owe about $19,400 on it. My monthly payment on this one is usually around $142/mo. Upon doing my taxes, this amounted to about $1200 in interest over the year.
So here's the deal. Being debt free has always been a huge goal of mine after I graduated college about six years ago. I've since paid off my car and paid of a good chunk of my loans. I have an opportunity to pay off an even bigger chunk here. I'd plan on paying off about $11,500 on my student loans if I go that route. The private loans have always been a concern, because I believe private loan terms tend to be less flexible. Also, it's a variable APR. So even though it's only 2.75% now, it can go up. And it may very well do that soon with all the talk of the Feds raising interest rates.
The federal loan is less of a concern to me because it's a fixed rate and federal loans terms tend to be more flexible. At the same time, it's the highest interest rate of the two and would probably make more sense financially to pay it off sooner. But also keep in mind that I can use the interest as a tax deduction each year, and this is my biggest deduction.
And then there's the house buying option. After consulting with my father and my best friend, I think I may have talked myself out of this for the time being. I am thinking that getting myself to a point where I'm debt free should take precedence over accruing more debt (i.e. a mortgage). However, I'm still open to ideas if you have an alternative view.
Highest interest rate as always. If they were close, say 5.75% and 6%, sure, go for the variable interest rate.
I don't particularly look at houses as a capital growth investment. If you can buy something where the mortgage would be less than you spend on rent, I'd go for it. Cheap money means it's a good time to borrow. At the same time, if interest rates do go up that's going to put a lot of downward pressure on housing prices. But if you can buy a house for $1,200 and you're paying $1,500 in rent, who cares what the price of the house does assuming you're buying it to live in rather than as any investment.
Highest interest rate as always. If they were close, say 5.75% and 6%, sure, go for the variable interest rate.
I don't particularly look at houses as a capital growth investment. If you can buy something where the mortgage would be less than you spend on rent, I'd go for it. Cheap money means it's a good time to borrow. At the same time, if interest rates do go up that's going to put a lot of downward pressure on housing prices. But if you can buy a house for $1,200 and you're paying $1,500 in rent, who cares what the price of the house does assuming you're buying it to live in rather than as any investment.
The problem is that the home loanership math is fundamentally predicated on long term homesteading, a condition that's increasingly unlikely for most of the proletariat. For the majority, relocation is a fact of life and as such, home loanership after normalizing for buy-sell transaction costs, nets them in a position where renting makes good sense for a good portion of their adult lives. But hey, people buy for non-economic reasons that make zero financial sense and you can't convince them otherwise. To each their own I suppose.
The problem is that the home loanership math is fundamentally predicated on long term homesteading, a condition that's increasingly unlikely for most of the proletariat. For the majority, relocation is a fact of life and as such, home loanership after normalizing for buy-sell transaction costs, nets them in a position where renting makes good sense for a good portion of their adult lives. But hey, people buy for non-economic reasons that make zero financial sense and you can't convince them otherwise. To each their own I suppose.
I believe it depends on where you're buying. In the Denver market, at least for the foreseeable future, houses get snatched up pretty quickly. So either you could sell it off within a couple of weeks in many cases, or you could use it as a rental property. The housing/rental market here is insanity right now.
Definitely pay off the 6% loan. That $15,000 -- do you have a separate safety net savings, or is that 15K the sum total of your savings? You should target keeping about 6 months of living expenses in cash just in case.
Definitely pay off the 6% loan. That $15,000 -- do you have a separate safety net savings, or is that 15K the sum total of your savings? You should target keeping about 6 months of living expenses in cash just in case.
Yes, you want to have savings available when you move into a home. We have put about 20k into our home in the 3 years we've owned it. About half was remodeling but we spent 9k was when the furnace went out and another 2k into the roof.
Definitely pay off the 6% loan. That $15,000 -- do you have a separate safety net savings, or is that 15K the sum total of your savings? You should target keeping about 6 months of living expenses in cash just in case.
This plan (paying off the loans) would leave me with about 2k in the savings account. Do you think I should leave the existing savings there and just pay my loans with future net income?
This plan (paying off the loans) would leave me with about 2k in the savings account. Do you think I should leave the existing savings there and just pay my loans with future net income?
I'd certainly want more than $2k in savings/emergency fund. Three months' expenses is as low as I'd got, not matter how stable your job is. I keep about six months' of expenses. If it was a credit card at 20%, I'd be more aggressive in paying it down but 6% isn't astronomically high.
I'd certainly want more than $2k in savings/emergency fund. Three months' expenses is as low as I'd got, not matter how stable your job is. I keep about six months' of expenses. If it was a credit card at 20%, I'd be more aggressive in paying it down but 6% isn't astronomically high.
True. Just thinking of ways I can free up some extra cash monthly. Truth be told, I'd probably only save about $70 (estimate) per month if I paid the $11,500 towards the federal loan, which isn't much in the grand scheme of things. I can certainly leave the money in savings alone and start chipping away at my loans now that I have a decent chunk saved up.
How secure do you feel in your job? How financially stable is your employer & industry & job function? If for some reason you lose your job, how do you feel about your prospects of getting a new one without moving? (For example, if you are a competent engineer in Silicon Valley, you could expect to get a half dozen job offers for good jobs with good employers within a couple of weeks).
If you feel quite secure, I suggest you put $10K against that 6% loan right now as in tomorrow. There are few places you can invest in where you can get a guaranteed 6% return (certainly not in bonds, and now one knows what will happen to the stock market going forward). Then, double up on your 6% loan payment. Maybe triple up.
I suggest you go to extreme measures in terms of frugality. There are many resources on the web and threads on C-D to give you ideas. With extreme frugality, some people will think you are nuts - but you have a specific set of objectives in mind and this can help you achieve them.
Until you have that 6% loan paid off, don't buy a house. Yeah, rent sux, but in the real world you have excellent prospects to get on the housing appreciation train - but in the real world, at $66K / year, you might be a bit light on income. Kill those loans (at least the 6%) before piling on debt through home ownership. It is very possible banks will loan you more money than you can afford to pay back, and you do not want to be in that position just to escape rent. Houses are usually more expensive to maintain than people imagine.
When you do purchase a house, get a housemate & charge him/her market rent. In fact, is there any chance you can take on a roommate in your rental? Imagine hypothetically having a roommate in your rental where you currently live and have that roommate pay enough to cover your student loans. Yeah, it sux, but in your case it could give you a lot of strategic flexibility.
Is there any chance for you to pick up a 2nd job or do some moonlighting?
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