Pay off Student Loans or Save for Down Payment?

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Banana_IHB

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Trooper's question in the thread below and the good advice in response prompted me to ask for similar advice. My household income will be about $220K starting in August. Our combined student loans are about $200K (yikes, I know), with most of the loans at 7.2-7.8% interest. Some are lower at around 4%, so we are extending those out as long as possible. But, as far as the higher interest payments go, should we extend those to 30 years and pay the minimum and save the rest for a down payment or should we pay off more of the student loans and have a smaller down payment? We think we can save, after taxes, around $50-60K per year if we extend the loans out. We want to be able to buy a 4bed SFR in West Irvine or 3bed in Newport with a yard in 2-3 years, and we will have around $250K income at that time. I just opened an HSBC savings account that pays 5.05% to put our down payment cash in. Thanks!
 
For what is it worth, I recently faced this same decision, and I chose to pay off my student loan. My interest rate was 8% as this was a holdover from the 80's (deferrments, consolidation, etc. It is amazing how long these hang around). I concluded I would not be able to consistently earn more than 8% in my investments, so I paid them off. My primary reason wasn't financial as much as it was psychological: I wanted to be totally debt free, and this was the last loan standing in my way.





For your circumstances, I would suggest you save up for at least a 10% downpayment first. Basically, if you don't have a sizable downpayment, you won't be able to buy in a few years. After you have some tangible savings, I would put money toward both until you have enough for 20% down after which I would put everything toward paying down the student loan.





If you save $175,000 as a 20% downpayment on a $875,000 home, you will have a $700K mortgage which would be a little over 3 times earnings. In 3 to 5 years, $875,000 will by a fantastic house (think 1.5 million now).
 
Thanks! That makes sense to me. I feel the same way about the debt. I just want to get rid of it. But, with the huge difference in interest rates for anything above 80% LTV, it also makes sense to put more to a down payment.
 
<p>Minimum down payment is an ever changing number. Only 3 months ago, you need 0% down for up to $1.25M loan. Today, you need 10%. With good credit, you can do 5%.</p>

<p>Your 80%'s rate will be lower, your second's rate will be around prime-ist (7.5%-8%).</p>

<p>IR,</p>

<p>Would you feel really bad to those that you reccomend to wait when future prices will turn out to be higher than now? I truly admire your strong conviction.</p>
 
nirvinerealtor,





"Would you feel really bad to those that you reccomend to wait when future prices will turn out to be higher than now?"





Probably not. If house prices can hold with the perfect storm raging, then house prices will never go down. Whatever is going to happen over the next 5 years is as bad as bad can get. If this turns out not to be bad, then it will not matter when you buy because real estate will always go up.





One thing I can say with certainty. Affordability will improve. One way or another, affordability will improve. Since I doubt everyone will see their incomes double, I believe house prices will go down. Nobody is "priced out forever."
 
<p><em>Would you feel really bad to those that you reccomend to wait when future prices will turn out to be higher than now?</em> </p>

<p>What does this have to do with the OP's issue? Honestly, I think you post on these boards to troll and antagonize more than provide some value added insight. </p>
 
Even if IrvineRenter's prediction on housing prices is not totally accurate (although, I suspect that he is right on), his advice this time was more waiting until I can actually afford a home, rather than try to buy as soon as possible with 5% down and be irresponsible. If prices go up from here, my $875K budget will only get me a 2bed, but at least I won't worry about foreclosure.
 
<p>Mel,</p>

<p>Based on the details provided in your posts, it sounds like you and your significant other are getting ready to start your careers at big law firms. Take it from somebody in the know, the average associate at a big firm only lasts 2-3 years before they burn out. "Churn and burn," as they say. Some associates jump to other big firms, some to "lifestyle" mid-size and small firms, some go in-house, some to government, some to public interest work, some leave the law altogether, etc. But unless you jump to another big firm, you will take a pay cut. As such, please be wary of basing your ability to service a mortgage on projections of your future income.</p>

<p>I've been explaining the above to my significant other for years. Its weird, but I may be earning more now than I ever will again (adjusting for inflation, of course).</p>
 
Skeptic,



One of us is going to a relatively large firm and the other is currently working at a so-called mid-size "lifestyle" firm (that still wants billables of 2500+). That is another reason that we want to wait a few years before getting tied to a mortgage. That way we have enough time to see if we want to stay at our jobs and have a more realistic long term picture of our salaries. For now, we will enjoy the big $ and save as much as possible.



How long have you been at a big firm? What are you thinking of doing next? Would you mind sharing what kind of salary drop you anticipate when you switch?
 
<p>Skeptic has it right. Burn out at the cookie-cutter firms is a serious consideration - especially if you let the big $$$ entice you into an unsustainable debt habit (unsustainable if you leave the big firm) The 4th and 5th year associates I know seem to curiously leave (right after they get the "retention bonus") to pursue other passions. One traveled the world for about 6 months. Another became a teacher. A third, started working at a non-profit. All worthwhile pursuits. While I think that you certainly have the training and the patience to read all of these posts and figure out the best route on your own, I'd only offer my congrats on making it into the field and a job well done on not being too hasty in buying a new home right away.</p>

<p>PS - 2500 billable is not "my" idea of a lifestyle. As a first year, I'd be suprised if the justification for 2500 billables would be any less than 3200 hours of actual work - which boils out to 6 days a week and 10 hours a day. But then again, times change... and maybe you guys are super efficient. In either event, get a gym membership (if one is not provided). You will most certainly benefit from it.</p>
 
GrewUpInIrvine - it is not our idea of a "lifestyle" either. It's amazing the lies attorneys will tell you during interviews (and entire summers)...currently looking to leave as even a big firm doesn't require these kinds of hours and they pay almost double!
 
<p>Sounds like we have quite a few of attorneys here.</p>

<p>I work with several real estate attorneys, both as clients and leagal counsels. I do feel for you, the dilema and the transformation that you go through, and the love-hate relationship that you have with the public that you have to endure.</p>

<p>Hang in there.</p>
 
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This is an article that i recently wrote for recent medical school grads...it applies to attorneys as well.

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<strong><em>Student Loan Debt is Good</em></strong>



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We've all heard the "Greed <em>is </em>good" line that Gordon Gecko espouses in Oliver Stone’s movie Wall Street.



Here’s my version. “Student loan debt <em>is</em> good.”



Now before you think I am out of my mind, let me first say that if you have a choice of scholarships, corporate tuition reimbursement programs or a rich relative, by all means take advantage of those free no obligation sources of funding first.



That said, in today’s environment, the <em>average</em> college student that graduates with a bachelors degree has roughly $20,000 in student loans.



As a former executive at the largest not-for-profit student loan company in California, I witnessed first hand the sheer magnitude of debt individuals are willing to accumulate in the pursuit of a higher education. Medical students in particular were some of our best customers since they had large balances sometimes exceeding $200,000. For most of us, having that much educational debt boggles the mind.



We have always been taught that debt is bad. We try to minimize it. I agree with that strategy with one exception. In the case of student loans, recent medical school graudates may want to consider a couple issues.



First, student loans are not all equal. There are student loans that are guaranteed by the Federal government (Federal Family Education Loan Program/Federal Direct Loan Program) and there are private loans. When I say “Student loan debt is good” I am speaking about Federal loans guaranteed by the US Government. Private loans are like any other type of debt you might incur in your lifetime. Federally guaranteed student loans are not.



Second, federally guaranteed student loans typically have better interest rates than private loans. In fact, a couple years back when the Federal Reserve pushed interest rates to below 2%, student loans weren’t far off. If you were lucky enough to graduate during that time and consolidate your loans, you are only paying around 2% in annual interest. That is certainly much better than ANY other debt you might have today.



And finally, if you also consider that should you ever run into financial hardship such as losing your job or a medical illness, your student loan payment can be deferred, sometimes for up to 3 years. What other lender in your life would do that for you? Certainly not your credit card company.



So for those of you that have student loan debt, consider paying off all other types of debt first, as they almost always will be less advantageous than student loans in terms of interest rates, terms and conditions.

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<em>"So for those of you that have student loan debt, consider paying off all other types of debt first, as they almost always will be less advantageous than student loans in terms of interest rates, terms and conditions."</em>





That is why it was the very last debt I paid off.
 
Certainly, student loan debt is about as good as debt can get (although, in my particular situation, both of my car loans (4.2% and 6.7%) have interest rates lower than most of my student loans). The question is not really what kind of debt to pay off first, but rather, whether to pay off debt or save for a down payment. In a way, a down payment is also paying off future debt, so I guess there is some relevance. From the advice above, it seems the best path to take is to (1) pay off higher interest rate debt first; (2) pay off student loan debt as it becomes due on a 30 year plan; (3) save all other extra $ for a down payment until you get to between 10 and 20% of the house you want/can afford; (4) buy a house use extra money after mortgage payments to pay off student loans as quickly as possible (assuming you also have some $ saved in case of emergencies). Sound about right?
 
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