Pay down student loans vs. build savings for house

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always206
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Pay down student loans vs. build savings for house

Postby always206 » Tue Apr 26, 2011 5:18 pm

Here is my situation:

My soon-to-be wife will be working as a nurse during law school. She has no debt -student loan or automobile or credit cards- none.

However, I have 15,000 in undergrad debt, and I am about to take out 30,000 a year for law school.

Should our extra money go towards paying down student loan debt, or building a nest egg for a down payment on a house?

It may seem silly to ask such a question, but I really don't know what to do.

If she pays a little while in school, I will still have an estimated 50-60k in student loan debt. But, we will have no money for savings and a down payment...

So...

Advice?

A few people I've talked to, including a mortgage banker, told me student loan debt isn't viewed as negatively as one might think. Yes, try to curb it as much as you can, but it's calculated different with calculating a credit score. Therefore, he suggested building a nest egg for a house, enter into a LRAP after graduation, and make payments. Subsequently, I can pay more over principle.

Otherwise, he said I would have less debt, but no down payment for a home. He said in this economy, a down payment for a young family is really needed...



Thanks!

Renzo
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Re: Pay down student loans vs. build savings for house

Postby Renzo » Tue Apr 26, 2011 5:22 pm

Where do you live? Will you stay there when you get done?

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albusdumbledore
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Re: Pay down student loans vs. build savings for house

Postby albusdumbledore » Tue Apr 26, 2011 5:26 pm

I'd save for the house. Over the long term, you'll probably lose more money by paying rent for a few years compared to the additional interest on those loans. Renting is basically throwing money away.

alumniguy
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Re: Pay down student loans vs. build savings for house

Postby alumniguy » Tue Apr 26, 2011 5:28 pm

More information needed. What do you see yourself doing after law school? Are you going into the government/PI route or private route?

Generally, I would suggest you reduce your debt before starting a nest egg. The last thing you want is to have the deferred interest you're not paying as a student capitalize into principal. So at a minimum, you should be paying off the interest that comes due each year (you may only need to do this right before you graduate, I forgot the specifics).

Student loans are viewed differently than other debt (e.g., credit card debt), but that doesn't in and of itself justify taking out more debt. It is still debt after all and you will be paying interest on that debt.

I also don't see the housing market recovering ANYTIME soon. I don't think real estate will ever be the short term investment is was in the early 2000s. It is a long term investment, but when you have debt that has interest rates of 6-8%, I would pay back that debt before signing myself up for a mortgage.

Renzo
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Re: Pay down student loans vs. build savings for house

Postby Renzo » Tue Apr 26, 2011 5:30 pm

albusdumbledore wrote:I'd save for the house. Over the long term, you'll probably lose more money by paying rent for a few years compared to the additional interest on those loans. Renting is basically throwing money away.

Lies and rubbish sold to you by the banking and construction industries.

alumniguy
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Re: Pay down student loans vs. build savings for house

Postby alumniguy » Tue Apr 26, 2011 5:31 pm

albusdumbledore wrote:I'd save for the house. Over the long term, you'll probably lose more money by paying rent for a few years compared to the additional interest on those loans. Renting is basically throwing money away.


Unless real estate continues to dip downward - then home ownership is also throwing money away. Home ownership, especially in this environment, continues to be risky. Although, to be fair, I am extremely debt conscious.

phillaw
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Re: Pay down student loans vs. build savings for house

Postby phillaw » Tue Apr 26, 2011 5:32 pm

Save for the down payment. Maybe pay a little on the loan if you want to deduct the interest payments if you file together. How bad do you want to own a home? If you're a city dweller who will likely rent for many years, then it might not be worth accruing interest on the student loans and saving for a down payment. But if you are interested in buying a house and settling in soon after graduation, you will need the flexibility of having a good down payment to secure a favorable mortgage rate. If your credit score is good and you have a good down payment, I don't think you will at all be hurt by the 105k student loan debt.

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zonto
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Re: Pay down student loans vs. build savings for house

Postby zonto » Tue Apr 26, 2011 5:36 pm

If your interest rate earned on your savings rate is higher than the rate on your student loans, then save for a house and make minimum payments. If your student loan interest rate is higher than your savings interest rate, pay down your loans.

I highly doubt that you're earning more than 1.2% on savings, so in my opinion pay down the loans. If you have one of those super low interest loans that are like 2% somehow, you could consider saving 50% cash in an online savings account and putting 50% in short-term, investment grade bonds to try and eek a little more yield, but you are taking on more risk. You also have to pay taxes on the earnings of what you're saving toward the house, which further erodes the already paltry yields.
Last edited by zonto on Tue Apr 26, 2011 5:37 pm, edited 1 time in total.

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albusdumbledore
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Re: Pay down student loans vs. build savings for house

Postby albusdumbledore » Tue Apr 26, 2011 5:36 pm

alumniguy wrote:
albusdumbledore wrote:I'd save for the house. Over the long term, you'll probably lose more money by paying rent for a few years compared to the additional interest on those loans. Renting is basically throwing money away.


Unless real estate continues to dip downward - then home ownership is also throwing money away. Home ownership, especially in this environment, continues to be risky. Although, to be fair, I am extremely debt conscious.


Yes, but you can live in a house. Unlike student loans, there is actually a tangible asset in play. Renting is a guaranteed loss.

alumniguy
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Re: Pay down student loans vs. build savings for house

Postby alumniguy » Tue Apr 26, 2011 5:41 pm

albusdumbledore wrote:
alumniguy wrote:
albusdumbledore wrote:I'd save for the house. Over the long term, you'll probably lose more money by paying rent for a few years compared to the additional interest on those loans. Renting is basically throwing money away.


Unless real estate continues to dip downward - then home ownership is also throwing money away. Home ownership, especially in this environment, continues to be risky. Although, to be fair, I am extremely debt conscious.


Yes, but you can live in a house. Unlike student loans, there is actually a tangible asset in play.


A tangible asset that has LOST value. So if you bought the house for $200k, but it has lost 25% of its value, you have effectively lost $50k. Home ownership is not for each and everybody in our society - it can be risky.

phillaw
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Re: Pay down student loans vs. build savings for house

Postby phillaw » Tue Apr 26, 2011 5:43 pm

alumniguy wrote:
albusdumbledore wrote:I'd save for the house. Over the long term, you'll probably lose more money by paying rent for a few years compared to the additional interest on those loans. Renting is basically throwing money away.


Unless real estate continues to dip downward - then home ownership is also throwing money away. Home ownership, especially in this environment, continues to be risky. Although, to be fair, I am extremely debt conscious.


there is a difference between buying a home and investing in real estate. if you have any plans to sell within 5 years, of course be careful and don't just go out an buy a condo without comparing your mortgage payment to local rent costs. but if you are looking for a long-term home, a good down payment can lower your interest rate and monthly payment. And mortgages don't have IBR like student loans. I say get your home and then pay off your student loans as soon as possible.

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albusdumbledore
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Re: Pay down student loans vs. build savings for house

Postby albusdumbledore » Tue Apr 26, 2011 5:44 pm

alumniguy wrote:
albusdumbledore wrote:
alumniguy wrote:
albusdumbledore wrote:I'd save for the house. Over the long term, you'll probably lose more money by paying rent for a few years compared to the additional interest on those loans. Renting is basically throwing money away.


Unless real estate continues to dip downward - then home ownership is also throwing money away. Home ownership, especially in this environment, continues to be risky. Although, to be fair, I am extremely debt conscious.


Yes, but you can live in a house. Unlike student loans, there is actually a tangible asset in play.


A tangible asset that has LOST value. So if you bought the house for $200k, but it has lost 25% of its value, you have effectively lost $50k. Home ownership is not for each and everybody in our society - it can be risky.


I agree it's a risk. And it depends on your particular situation (like how long you'll be in the area, real estate market, etc.). But this guy sounds like he's settling down, and like I said, that rent money is guaranteed to be gone forever.

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CmonSD
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Re: Pay down student loans vs. build savings for house

Postby CmonSD » Tue Apr 26, 2011 5:51 pm

House for sure. If you are taking out loans and using them for living expenses, why pay someone else's mortgage when you could pay your own? At least in the end, as someone else stated, you have a tangible asset, and you have to spend that money to put a roof over your head anyways. IF the market ever turned around, you could sell and pay off at least part of what you used in loans to buy it. You rent...you get nothing back...ever.

alumniguy
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Re: Pay down student loans vs. build savings for house

Postby alumniguy » Tue Apr 26, 2011 5:52 pm

phillaw wrote:
alumniguy wrote:
albusdumbledore wrote:I'd save for the house. Over the long term, you'll probably lose more money by paying rent for a few years compared to the additional interest on those loans. Renting is basically throwing money away.


Unless real estate continues to dip downward - then home ownership is also throwing money away. Home ownership, especially in this environment, continues to be risky. Although, to be fair, I am extremely debt conscious.


there is a difference between buying a home and investing in real estate. if you have any plans to sell within 5 years, of course be careful and don't just go out an buy a condo without comparing your mortgage payment to local rent costs. but if you are looking for a long-term home, a good down payment can lower your interest rate and monthly payment. And mortgages don't have IBR like student loans. I say get your home and then pay off your student loans as soon as possible.


I don't disagree that a good down payment is key. My point is simply that OP should NOT be saving money now to build a nest egg when that will result in 40k in extra loans (90k + 15k = 115k vs. 50-60k as stated in original post) at 6-8%.

Presumably OP will be renting throughout law school, I don't see why OP can't continue to rent for a few years before buying a house. In the 40 year long run this may not be the most economically effective approach (I don't feel like doing the modeling at the moment), but over leverage at a young age when you don't have job security is a more immediate issue.

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voice of reason
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Re: Pay down student loans vs. build savings for house

Postby voice of reason » Tue Apr 26, 2011 5:53 pm

I don't take it for granted that someone in your position can or should buy anytime soon after graduation. That depends where you live (what the local housing market is like), what kind of job you get, and how long you expect to stay put, among other things. It matters how long it would take you to pay off the student loans and how long it would take you to save a down payment, because these affect what you end up paying in interest.

If you want to buy a house, you need some cash. Without substantial cash for a down payment, you will either get screwed on the financing or you will not be able to buy a house at all. Assuming it does make sense to buy, you should have 20% for the down payment plus several thousand extra for closing costs and other expenses. Once you've got that saved, put all you can into paying down the student loans.

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sambeber
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Re: Pay down student loans vs. build savings for house

Postby sambeber » Tue Apr 26, 2011 5:54 pm

Do you have an emergency fund? Have you considered unexpected expenses while in law school, immediately after, or if you have to fund a (potentially protracted) job search immediately after law school?

I would think that is one consideration here.

Renzo
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Re: Pay down student loans vs. build savings for house

Postby Renzo » Tue Apr 26, 2011 9:56 pm

albusdumbledore wrote: rent money is guaranteed to be gone forever.

Again, lies sold to you by the real estate industries. Renting is almost always cheaper than buying when all costs (mainly maintenance and interest) are considered, and the historical rate of return on residential real estate is consistently lower than other available investments, so most people would be pissing money away by buying, not renting.

If prices are low enough, and you plan on staying in a house for 20 years, then you're right, it makes financial sense to buy. For most people, however, buying may not be a good idea at all.

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mpj_3050
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Re: Pay down student loans vs. build savings for house

Postby mpj_3050 » Tue Apr 26, 2011 10:09 pm

Biggest question is what school and subsequent market.

always206
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Re: Pay down student loans vs. build savings for house

Postby always206 » Tue Apr 26, 2011 10:10 pm

Thank you all for the responses. I am shocked this question isn't more popular.

Ultimately, which scenario would be best:

a) 150k in student loan debt w/ 60k in savings

b) 60-70k in student loan debt w/ 2-4k in savings

Thank you for your input.

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mpj_3050
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Re: Pay down student loans vs. build savings for house

Postby mpj_3050 » Tue Apr 26, 2011 10:20 pm

I'd take option B but this all depends on school and region.

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zonto
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Re: Pay down student loans vs. build savings for house

Postby zonto » Wed Apr 27, 2011 12:18 am

In answer to the second question, again, it would depend on the rate you are earning on your savings and paying on your loans. It also depends on what happens with inflation and other factors.

bdubs
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Re: Pay down student loans vs. build savings for house

Postby bdubs » Wed Apr 27, 2011 10:35 am

You should pay down your student loans.

You can get an FHA loan for a slight interest premium and only put down a small fraction of the principle. If you have good credit the rate on your FHA should be lower than GradPlus loans, and you should be able to keep your Gradplus to a minimum at 60-70k in total debt.

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thunderflesh
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Re: Pay down student loans vs. build savings for house

Postby thunderflesh » Wed Apr 27, 2011 10:47 am

Struggling with a similar issue; in part, it depends on what kind of job you think you'll have after graduation.

10 years is a long time, but if you REALLY think you'll be in public service for the duration, and will therefore have all your student loan debt forgiven, then obviously the nest egg is the better option. The thing is, that's a BIG BIG BIG if.

If you're going into biglaw/private, or just definitely not doing the 10 year IBR public service thing, then paying down the loans earlier is definitely better.

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AreJay711
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Re: Pay down student loans vs. build savings for house

Postby AreJay711 » Wed Apr 27, 2011 10:54 am

I think the issue is that any investment to pay off student loans is going to net you 7.9% return guaranteed. You probably won't find another investment that good and you will likely have to only save 1-2 years of 2 incomes to rebuild your savings to buy a house.




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