When you’re buried under thousands of dollars in educational debt, it’s easy to think you have to put the rest of your life on hold. In fact, according to a recent report from the National Association of Realtors, wannabe homeowners with student loan debt wait seven years longer to buy homes than those without.
But is paying down those loans ASAP while waiting to buy a home the smartest move? Or is taking your time to pay them off while amassing a down payment the way to go? It depends on a lot of factors, but here are some key considerations to help you make the best choice for your situation.
WHEN PAYING OFF YOUR STUDENT LOANS FASTER MIGHT BE A GOOD IDEA
You have private student loans. Private loans often have higher interest rates than federal loans, or may have variable interest rates that can shoot up. Plus, private lenders typically offer fewer (if any) options for alternate payment schedules, refinancing or deferment, which federal loans offer. It can be a wise move to get private loans off your plate sooner rather than later. Just check to see if your private loans impose prepayment penalties.
You hate paying the interest. If you have high-interest student loan debt, you likely already know that waiting to pay off your balances could cost you big in the long run. But even with low-interest loans, the interest you pay can feel painful if you’re dealing with a big balance. The sooner you can eliminate the debt, the more money you can save — and the quicker you can start putting your money to work on your future in other ways. (Just make sure that your lender knows you are putting any overpayments toward your loan principal, and not future interest.)
Here’s a caveat: If you have consumer debt, like credit cards or personal loans, that charge a higher interest rate than your student loans, it’s better to focus on paying those down first. At least with student loans you may be able to get a tax deduction on the interest you pay — the only thing you’ll get out of keeping credit card debt is the potential for a ballooning balance.
You want to improve your odds of qualifying for a home loan. If you want to qualify for a home someday, a high debt-to-income ratio (DTI) can hurt you. Sure, student loan debt is considered “good debt,” but it’s still factored into your DTI, and having too much total debt can make you appear less financially stable to lenders. Whittling down your debt or wiping it out altogether can make you a more attractive home loan candidate.
You’re not planning to buy a home soon (or at all). Maybe you’re not ready emotionally, you’re planning to move to a different city within the next few years, or your credit isn’t up to par yet. Even still, some people simply don’t want the responsibility, financial or otherwise, of home maintenance — and that’s perfectly fine. Directing your focus on your debt payoff plan may be the best choice for you.
WHEN SAVING FOR A HOME MIGHT BE A GOOD IDEA
Your other debt is under control. If you pay off your credit cards each month, have little to no other consumer debt, and are perfectly comfortable with your current student loan repayment plan, revisit your budget to see if you have the breathing room to start a home down payment fund. Taunya Kennedy, a certified consumer credit and student loan counselor at Money Management International, a credit-counseling nonprofit, suggests asking yourself this: Can you comfortably cover your everyday living expenses, make appropriate payments on your debt, and then dedicate funds toward a down payment? Break out the Excel sheet to map out it all out and see where you stand.
You’re eligible for loan forgiveness. If you’re eligible for a loan forgiveness program, Kennedy recommends just paying the minimum due on your student loans, because you’ll be forgiven of your remaining balance after 10 years of payments. “You’re trying to pay as little as possible and maximize the benefit,” she says. If you’re lucky enough to be in that position, then whatever overpayments you would have put toward your student loans could go toward saving for a down payment, or any other big money goal you have.
You’ve made homeownership a high priority in your life. At the end of the day, whether or not to prioritize buying a home is really a personal choice. The important part is being prepared for that responsibility financially — not just in saving for a down payment, but also in keeping up with future mortgage payments, taxes, insurance and regular home repairs and maintenance.
If you really don’t want to put off owning a home, Kennedy notes that you can switch to a longer-term student loan repayment plan to help reduce your monthly payment. That way, you can free up additional cashflow that can go toward an equity-building investment like a home. The trade off, however, is paying more student loan interest in the long run.
Ultimately, you don’t have to take an all-or-nothing approach. “I encourage clients to save for a home, retirement and college savings — all while paying off debt,” Falzone says.
Just be sure you’ve got yourself covered before finding a place for your “extra” money. This includes keeping a solid emergency fund and saving consistently for retirement. And if you need to, consider working with a financial pro to help you pull a plan together that enables you to cover both your short- and long-term goals.