Buying Home Before Paying Off Student Loans?

Question

Hey, I was wondering, I'm in the process of 0 balancing all of my credit cards. The only debt I will have after that is about $8500 in student loans(DIRECT UNSUB STAFFORD LOAN), its 3 loans but the highest interest rate is 4.66%, the expected payout year is 2027. My minimum monthly payment is about $52.00 a month but I generally pay around $120 to $150. I currently pay $940 dollars a month in rent, not including utilities. I am currently 24 years old. My salary range as I won't give the exact is somewhere in the range of  $75,000 - $95,000. I'd really like to start saving for a house(multifamily) once I finish wiping out my credit cards. I've been listening to Dave Ramsey a lot and he advises most people to pay off all debt before buying a home.

I was thinking that once I have no more credit card debt, I will start saving for a house. Dave Ramsey would probably say wipe out that student loan as well before buying a house. I would prefer to save the money that I would be using to wipe that loan out and buy a multifamily and househack. Once I'm in said home I would purely focus on my only debt at that point(minus the mortgage) which would be the student loan and just throw as much money at the student loan as possible each month until its gone.

I am seeking input, please feel free to give me opinions as I am seeking some guidance.

Thanks!

Laura Hines · Answer

@James DuBois my husband and I are in a similar situation. We started out with a little more student debt than that. Around 12k and have paid off around 40% of them off now and we have similar interest rates on our loans. I don't know what our minimum monthly payment is, but we pay around $250/month on them just to try and knock them out. We made combined that much last year (as we both switched to better jobs mid year) are also 24. We just closed on a multifamily a few weeks ago. It is completely a personal decision, but we decided that by saving $500/month on where we are living to also build equity in a property is much more worth it than the interest on our loans.

Scott Mac · Answer

Hi James,

Since it is personal, you could decide by "Math" or by "Feel" on this one.

By Math.  You could easily figure out how much extra loan you would qualify for, based on the payments not being there, and the increase of your credit score/lower interest rate (if applicable) if paid off. (Is that important to you?)

By Feel.  Extinguishing debt may make you feel free. Although you will replace it with other debt. (Is that important to you?)

Then if you decide to extinguish it early, the question then becomes how fast do you want to pay it off. Ripping off a Band-Aid or pouring molasses.

For instance if you wanted to do it fast, you might want to look into a weekend temporary job from a temporary service and steer all of the extra money into that debt.

Just my thoughts,

Good Luck!

Mike Roy · Answer

@James DuBois - A big congratulations on attaining employment in the $75k-$95k and only having to accrue $8,500 in student loans.  There was a recent post on here with someone considering taking on $300k for the same salary!

It's a personal choice, but I can tell you that I chose to keep my low interest loans and pay the $215 per month.  The simple way to look at it is that if you can invest $8,500 in cash flowing real estate at a 10% cash on cash return, then you net $70 per month - enough to service your student loan while also owning a piece of real estate that additionally pays you in tax benefits, inflation hedging and mortgage reduction.

I feel like the Dave Ramsey stuff appeals to a mindset that prefers to be debt free.  However, you can see with this example that you can grow your wealth faster without extinguishing this debt.

John Franklin · Answer

Sorry if that sounds harsh.  Maybe it takes you 4-6 months if your salary is at the lower end.  But the point is a tight written budget creates extra income out of thin air.  Eliminating luxuries short term maximizes long term investment returns.  I’m all for lowering interest rates and paying off the lowest balance first, but if you’re anything like myself at 24 or my kids, or any others at that age and making that much money; you’re likely leaking cash every day.

When you have a seven or eight figure positive net worth, do it your way.  Until you do, just try it Daves way.

John Franklin · Answer

Most people are pretty good at math, especially comparing pricing, interest rates and ROI.  Most people are also pretty poor at calculating and mitigating risk or accurately remembering bad past mistakes.  We tend to look back on our prior results, highlight the positive and rationalize the negative.

Daves not always right, but you do have way too big a shovel to be putting off paying that measly student loan debt.  Debt is for real estate leverage and 3-5xing returns, not ex students or luxuries.

Execicse some financial muscle and Pay off the student loan in three months.  If you really miss it and don’t feel better without it around, you can always go back and reborrow the money.

Mike Roy · Answer

@James DuBois - If that's the case, and if you can find a house hack that lets you live for free, then your return would be whatever you would have spent on comparable rent.  Maybe it's $800 or so.  That's a much better return than $52!  Good luck!

James DuBois · Answer

Mike, thank you and your input is most definitely appreciated. So you and I seem to be in agreeance, yeah definitely using that cash as a downpayment would be great as more than likely I'd be doing an FHA loan as this would be my first home and I would be occupying it. So that $8500 is more than likely my whole downpayment maybe even closing as well depending on the house price. (Parts of Ohio tend to be cheaper than most places).

Buying Home Before Paying Off Student Loans?

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