​Student Loan Pay-down or Real Estate Investing?

Student Loan Pay-down or Real Estate Investing?

It is common in today’s world for young professionals to be saddled with massive student loan debt. According to LendingTree, an online loan marketplace, 69% of college students took out student loans. These students graduated with an average debt of $29,800 including both federal and private student loan programs. The number grows exponentially for graduate program students. As a nation, we owe over $1.56 trillion in student loan debt. Some argue that higher education is the next massive bubble facing the United States. With all this debt, even people with high paying jobs and relatively aggressive savings rates have to ask themselves whether they should prioritize student loan pay-down by making larger payments or if they should make minimum payments and invest this extra money.

Let me preface this discussion by saying each and every situation is different, and that personal finance is just that – personal. A straight mathematical solution can be derived to answer this question. If the expected returns from your investment are larger than the interest rate of your student debt (accounting for the tax benefits of student loan interest payments), then the extra money should be invested. However, this does not consider psychological benefits of paying down unsecured debt, ability to access capital for real estate investments and the associated credit score impacts, and the ability to accurately pin down the exact return your investment will earn.

A bit about myself, I had the amazing opportunity to trade military service for graduating college with very little student loan debt. However, my wife was not blessed with this same opportunity. She felt called into the veterinary service – an occupation that requires four years of graduate school in addition to an undergraduate degree. She is on track to graduate with a substantial student loan burden (certainly in excess of that average student loan debt quoted above).

Being a real estate investor, we had to have a very frank discussion on how to handle the repayment of that debt.

Thankfully, it is easy and straightforward to calculate the cost of the student loan debt. These are fixed rate loans that can be repaid through a variety of different, and measurable, repayment plans. The opportunity cost side of the equation is much more difficult to calculate. With our specific situation, we have decided to live frugally off of my salary while investing what we do not need for living expenses and take the vast majority of her net salary after taxes and aggressively pay off her student loans in less than 5 years.

Why would we do this instead of make minimum payments?

• 1. Being free of unsecured debt puts us in an overall much stronger financial situation with way less “lifestyle overhead” that will allow us to feel comfortable pursuing deals that may not cash flow right away or may require substantial habitation.
• 2. Putting ourselves on an aggressive repayment plan allows us to work out and flex our “savings muscle.” The habits we force ourselves into to pay down this large of a debt in under five years will be much easier to carry forward and take that new found monthly cashflow (what we were putting towards debt) and invest with the same aggressiveness.
• 3. My wife will then be able to qualify for loans with her much stronger financial situation. We have put both of our current investment mortgages in my name only, allowing us to maximize our allotment of “conforming” mortgages.
• 4. Just because we will be aggressive with our loan pay-down does not mean we will not be able to invest at all. The last two houses we purchased were off of one salary. We will be able to continue growing, albeit at a slower pace, off of just my salary for the next couple of years.

Student loan debt will continue to be a major player on the real estate front in the foreseeable future. It is one of the major reasons well-educated individuals with strong jobs continue to be renters in many markets. Having a plan to deal with this while not completely putting a stop to investing is a priority of mine. The only wrong plan is not having a plan to deal with this, and other debts, in your own lives.