Should I pay off my $360k student loan debt or invest?

Question

Hi, my name is Monique and I am a newly graduated dentist. I’ve entered my profession with a mountain of student loan debt ($360,000 to be exact). My plan was to make small payments on my student loans and focus on saving money for a downpayment for my first investment property, but my family seems to think this is a bad idea. They think I should continue to live at home for the next 8-10 years and put all my income towards my loans. The interest rate on all my loans is an average of 6%... what do you all think? Invest or pay down my loans?

Mindy Jensen · Answer

@Monique Sison, I used to feel the same way that @Payton Reid felt - pay off debt before investing. But then I interviewed @Craig Curelop on the BiggerPockets Money Podcast (Episode 35) and the way he started investing while paying the minimums on his student loan debt has that route making sense.

Jason Turgeon · Answer

I graduated in 2007 with ~$80k in student debt. I put my loans into deferment for a year and during that time bought my first 2-unit multi family (lived in one, rented the other).I have made a little bit higher than minimum payments on my student loans for 12 years now, and did take a chunk of cash I came into to pay off one of the loans entirely. But I still owe about $30k after all these years and make $400 monthly payments (about $100 more than the minimum).Assuming all goes well with my current deal, I will soon own 25 doors. Once I finish rehabbing and refinance one of my other deals, I'll have something like $150k cash in the bank and a decent net income from the rentals. I could pay off the remaining $30k at any time, and would love to be mentally free of that debt.

But it doesn't make sense. I have refinanced to be down under 3% interest on that student debt. I can reliably make ~15% returns by investing in real estate.

Given how much debt you have and your current living situation, I would split the difference. Assuming you net $10k/month after taxes and you can live on $2k/month as long as you are at mom and dad's, take the remaining $8k and save it until you have enough for a decent down payment and reserve funds on either a house hack or rental that will allow you to live for free and get out of mom and dad's. That should be 6-12 months depending on your area, unless you are in one of a handful of expensive cities.

Once you are into a situation where you are on your own and living with your mortgage covered by house hacking/tenants, then you could do something like pay 50% of your $8k savings towards the loans and save 50% for the next investment. Having that $360k hanging over you forever (with the interest capitalizing at your $35 payment level) is not ideal and you need to attack it sooner or later. If you can continue to live cheaply, you can buy another investment every 6-12 months and still be on a path to have your debt paid off in ~10 years.

One thing you should definitely be doing no matter what else you do is trying to restructure that debt to get a much better interest rate. Even if you can only get a portion of it down, it will help a lot.

As far as finding a lender, I'd recommend that you go interview some local private banks (usually identified by "bank and trust" or just "trust" in their name, or characterized by lots of talk about wealth management on their websites) and talk to them. Lay out your circumstances and your plans just like you did here. You should be able to find a banker who is willing to work with you and wants to build a relationship with you and help you grow your portfolio. It may take a while but there are some excellent private banks out there and they cater to people in your income bracket with custom banking solutions.

Monique Sison · Answer

@Payton Reid thanks for your response! Good paying job, check, $5k for emergencies, check. Now all that’s left is the modest rental property and to find a lender who I can qualify with!

Payton Reid · Answer

@Monique Sison I would recommend focusing your attention on finding a good paying job, save $5k for emergencies, move into a modest rental property so you can start living your own life, then start tackling your debt.

I would crush your student loans before investing.

Theresa Harris · Answer

I can't see that payment plan lasting long as to pay the principal alone would take almost 900 years.  Your debt to income ratio will be a problem and $360K is a huge student loan.  Why not look for a home where you can rent out part of it and live in the other part?  A duplex or single family home with a basement or secondary suite.

If you are making $170K and living at home, but saved only $20K; you should also review where your money is going.

Natalie Kolodij · Answer

I'm with Mindy on this one.

The right investments will help you pay down that debt faster while giving you assets, equity, ect.

Are you in a position to look at a house hack of a duplex/fourplex type property for a first investment?

Then you're only saving 3.5% down, you will ideally be living for free (so your current rent payment you can throw at student loans), and then and additional profits you can save toward your next purchase or also pay down the loans.

Account Closed · Answer

As a general rule, if you can make a rate of return that is higher than the interest on debt, then from a money efficiency standpoint, you would want to do that.  For example, if your debt costs you 6%, but you can make a guarantee rate of return of 10%, the difference between the two, 4%, would be the gain in your wealth.

Frank Geiger · Answer

This is why Dave Ramsey is so popular with his debt snowball methods; because it's such a psychological game to pay off debt. Sure, you can huddle in your families garage for the next 10 years and pay your loans off. But is that really motivating you to continue?

A lot of good advice here. My advice is to start your own life, save money, house hack, then tackle your debt. House hacking can save you an additional $1,000 a month and speed down your debt payments. Good thing is you make more money than most people. So this may be a quicker process.

Monique Sison · Answer

@Damaso Bautista thanks for the response! Right now I have a great income ($170k before taxes) and no liabilities since I live at home, I’m very lucky! So far in the past year, I’ve saved about $20k, but I recently started on a new repayment plan (PAYE) for my student loans that allows me to make $35/month payments so I can save even more aggressively. I’m trying to find a lender with a program for doctors, because you’re definitely right.. most lenders don’t love my debt to income ratio!

Damaso Bautista · Answer

@Monique Sison

Hey Monique first I would like to congratulate you on becoming a dentist.  Before you make decision about investing in real estate, I would first explore the following:

1.How much income do I have coming in

2. What are my liabilities or how much money do I have to pay out every month

3. How much disposable income do I have

4. How long will it take to save enough money to put down on an investment property

5. Look into what mortgage loan you can qualify for being that your debt to income ration as it stands is very high

Some side notes:

If your parents are letting you stay at home, take advantage of that and save as much money as you can

While you are pondering your path, I would pay the minimum on your students loans until you can determine just how you want to approach the real estate investment game

You need to way more detailed and educated on what exactly its going to take for you to buy your first investment property.

It is not impossible but its not going to be easy.  Good luck!