Okay...housing question.

[ScrimpAndSave]

Looking into the future...no major house fever here.

My fiance found out that when he graduates from law school, he will be taking a job as a law clerk and make roughly $40,000 a year.

That makes his take home pay roughly $2500 a month. My take home pay will be $3750 a month.

Our only debt will be his student loans (about $120,000) which will be around $800-$900 a month.

Half of the debt is at 8.2% and the other half is at 6.5%. He will hopefully be able to consolidate them during the summer of 2009. We get married in Sept. 2009.

Should we even entertain the idea of buying a home? Should we rent cheap ($700-$800) and kill his student loans or let them die a slow death?

Thanks for your thoughts! I've learned so much through this forum.

[maat55]

I would advise you to keep your living expenses the same and knock the debt out quickly. I would set a goal inside of 5 years. Using his income for just the loan would knock it out in 4 years. If he earns more each year it could be gone sooner. I'm a big believer in living on one income, his should be for paying off debt and investing. Good luck.

[ScrimpAndSave]

Thanks Maat...obviously not what I want to hear - but we need to be realistic.

[maat55]

Originally Posted by ScrimpAndSave

Thanks Maat...obviously not what I want to hear - but we need to be realistic.

You would need a very deep committment to do this plan. Not many people would do it. But the reward would be great. It would give you the confidence that you could achieve any goal you wish.

Even a compromized version would be good. You spend enough time focusing on personal finance, I'm sure you will find a good solution and establish a good financial plan for your future.

[ScrimpAndSave]

Yeah I guess everyone wants a piece of that American Dream...and I am of course majorly feeling that. Rent is pretty cheap around here...and we are with my dad right now for $400 a month. If he wanted to sell (which he has been hinting about around January 2010), then we could rent relatively cheap...for maybe even $600 a month.

Maybe I need to seek a financial advisor. I know there are Dave Ramsey certified ppl. around here. When we get married, I will have about $30,000 saved which I was going to put toward a house...but maybe I just need to keep beefing up that savings while he pays off debt.

::sigh::

[maat55]

Don't worry that life is passing you by, it's not. Make well thought out decissions and stay out of debt the very best you can.

[ScrimpAndSave]

Will do. I'm happy that we are both out of CC debt. My fiance did have $20,000 in CC debt, but he took out a loan from a credit union with a MUCH lower interest rate to pay it off. He's a great saver...the CC debt was from a time when he was not working and his student loans wouldn't cover his living expenses. He hasn't used the credit cards for years...so he doesn't have bad spending habits.

I'm definitely going to speak to a financial advisor about our situation when he gets out of school.

[gamecock43]

When does he finish?

[LuxLiving]

Has he paid of the credit union yet?

[jIM_Ohio]

Originally Posted by ScrimpAndSave

Looking into the future...no major house fever here.

My fiance found out that when he graduates from law school, he will be taking a job as a law clerk and make roughly $40,000 a year.

That makes his take home pay roughly $2500 a month. My take home pay will be $3750 a month.

Our only debt will be his student loans (about $120,000) which will be around $800-$900 a month.

Half of the debt is at 8.2% and the other half is at 6.5%. He will hopefully be able to consolidate them during the summer of 2009. We get married in Sept. 2009.

Should we even entertain the idea of buying a home? Should we rent cheap ($700-$800) and kill his student loans or let them die a slow death?

Thanks for your thoughts! I've learned so much through this forum.

I am of the opinion you should get the house if you can keep the payment moderate (maybe $1000-$1200-month). Possibly a little more, here's my logic:

1) You would getting a property which is close to bottom of housing market with interest rates at relative lows.

2) An $800/month rent payment and $1000/month mortgage payment would be about the same considering after tax returns in 25% tax bracket. If you are in 28% bracket, you could up the $1200 to $1300 or $1400.

3) It's going to take 10 years or so to pay off the student loans. That is time wasted if you are renting, IMO. Build equity while paying down debt.


In general my advice to people without much consumer debt will be a broad financial plan. Invest 15% for retirement. Build equity in a house/ Slowly pay off student loans (put loans on a 10 year repayment plan if they are not already).

In general inflation will work for you:
The student loan debt will seem small as salaries increase and the debt load decreases over time.
The mortgage payment will seem small as salaries increase and the mortgage payment stays the same.

[ScrimpAndSave]

Thank you Jim, this is what I was struggling with a little bit. I wasn't sure if it was smart to have a house payment or not...with the student loans at all. But I was thinking that we will be making a substantial amount of money...and if we have a mortgage of about $1600 a month (I realize this is more than what you recommended), it would put us in our FOREVER home...not a "starter" home...

If we wait until a year after we are married, according to my savings plan, we should have about $80,000 saved up for a home. I think it would make it possible...even with student loans...to buy a house rather than rent...


Thank you all so much!

And Lux, by the time my fiance graduates, his loan will be at a balance under $10,000...he is going to apply just about everything he is making toward that loan, so we should have it knocked off quickly.

[Fizgig]

Why is he going to take such a low paying job, relative to his debt load?

A good rule of thumb is that your total student load debt shouldn't exceed your first year's salary. If this job has strong potential to be a stepping stone to greater things (and SOON), I can understand, but at first glace it seems like a bad idea and he should look for something better.

[jIM_Ohio]

Originally Posted by Fizgig

Why is he going to take such a low paying job, relative to his debt load?

A good rule of thumb is that your total student load debt shouldn't exceed your first year's salary. If this job has strong potential to be a stepping stone to greater things (and SOON), I can understand, but at first glace it seems like a bad idea and he should look for something better.

Good freakin luck with this.

I graduated with about 80k in debt.

My starting salary was less than half that. I graduated from a top 5 Mechanical Engineering program. I had fraternity brothers which made more than I did, but not 80k out of school (60k maybe).

[jIM_Ohio]

Originally Posted by ScrimpAndSave

Thank you Jim, this is what I was struggling with a little bit. I wasn't sure if it was smart to have a house payment or not...with the student loans at all. But I was thinking that we will be making a substantial amount of money...and if we have a mortgage of about $1600 a month (I realize this is more than what you recommended), it would put us in our FOREVER home...not a "starter" home...

If we wait until a year after we are married, according to my savings plan, we should have about $80,000 saved up for a home. I think it would make it possible...even with student loans...to buy a house rather than rent...


Thank you all so much!

And Lux, by the time my fiance graduates, his loan will be at a balance under $10,000...he is going to apply just about everything he is making toward that loan, so we should have it knocked off quickly.

I had a house payment with some student loan debt.

I graduated with 80k in debt (84k I think was exact amount???) and had a house (condo) within 3 years of graduation.

Monthly student loan payments were
$200
$200
$100
$325

My rent payment was $675/month at the time- more to student loans than to rent. I rounded up all payments (for example the $200 payment actually was $190/month and in 3 years my extra payments had that down to $125 or so on the minimums. There was also a $454 car payment in there too.

The tax returns when I was in the condo paid off the student loans. I moved again 5 years later and all the debt was gone (I paid off all student loan debt in 8 years). This was in addition to 10k of cc debt I graduated with.

If you have the cash flow to make the $1600 house payment, do it.

Here is what you want to do to better prepare:

1) Look at your taxes now (if you are single but getting married, make sure you run taxes both ways). It does not cost you anything to do the looking at taxes.

Use Turbotax online and do your 2008 taxes. Then after you file your return, go back in and change the following:

1) write down current refund or tax liability for 2008 filing.
2) switch married status (and add spouse's income). See if refund changed and write it down
3) add in mortgage interest and see if this changes the return more. $1600 will be about $1400/month in interest... *12 months=$16800, if in 25% bracket you would get an additional 4k back. This does not even factor in deductions for property taxes or other itemized deductions.

General financial "conventional wisdom" is to have a large mortgage to reduce taxes considerably. You will see people comment you pay $100 in interest to get $25 back- this is true. But compared to renting where you get nothing back, house is a better deal. A small mortgage gives you a place to live, but the interest might be half what I calculated above and not above the standard deduction.

So over time you will lower taxes when you are young (and paying lots of interest).

Then inflation will take the fixed rate mortgage payment and make it smaller.

Then the house appreciation (on the larger property) should increase with inflation.

So in the end you will have a paid for house which kept pace with inflation and lowered your tax profile as your income rose.

My house is worth 40k of deductions for wife and I, and knocks us from 25% tax bracket based on gross income into 15% tax bracket. That 10% savings is better than any investing advice I can find.

[loveviolet]

When you do the planning, consider one thing: Loan payment and mortgage payment do not go up if you fix them. Salary could go up dramatically after two years. 40k is not a good number for law school graduates.

I have graduated 5 years now and getting 2.5 times of what I was paid initially.

[Fizgig]

Originally Posted by jIM_Ohio

Good freakin luck with this.

I graduated with about 80k in debt.

My starting salary was less than half that. I graduated from a top 5 Mechanical Engineering program. I had fraternity brothers which made more than I did, but not 80k out of school (60k maybe).

Not trying to be harsh or anything, but I think that you took out too much in loans. People do it all the time and you're certainly not the first.

Cost benefit wise, it makes no sense to take out $120k when you'll only make $40k, and have to spend a third of your take home on debt repayment. Back to the original poster, there MUST be jobs where he can make a better salary.

I also graduated from a top engineering school, but with $22k debt and a $45k starting salary. My family had no money to assist me, so I did community college for the first two years, paid for it as I went, and worked enough to at least pay my living expenses. Scholarships helped my senior year, but even if I hadn't gotten those I still would have had low debt. It can be done.

[jIM_Ohio]

Originally Posted by Fizgig

Not trying to be harsh or anything, but I think that you took out too much in loans. People do it all the time and you're certainly not the first.

Cost benefit wise, it makes no sense to take out $120k when you'll only make $40k, and have to spend a third of your take home on debt repayment. Back to the original poster, there MUST be jobs where he can make a better salary.

I also graduated from a top engineering school, but with $22k debt and a $45k starting salary. My family had no money to assist me, so I did community college for the first two years, paid for it as I went, and worked enough to at least pay my living expenses. Scholarships helped my senior year, but even if I hadn't gotten those I still would have had low debt. It can be done.

The advice of salary relative to loan debt is mis guided. A Lawyer might rack up 100k+ in debt, but not be able to earn 100k until they pass bar (which is not related to school/debt, but related to employment). The 100k needs to be paid back before the person passes the bar.

A doctor might rack up 150-200k in loans over 8 years, maybe 10. They will need to pay off loans while they are in a residency or fellowship, even though the big payday would be after the 3 year fellowship is finished. The followship, I am guessing, pays 1/3 what the starting salary of a doctor really is.

In my case I had an extra year of school (took me 6+ to graduate) which cost me 8k. Community college is not an option as my school accepted few transfer credits. At the time I went 12k-14k tuition was a bargan relative to private top enginneering programs (compare to Stanford, MIT or similar and my school was a BARGAIN by more than a 50% discount).

I think the debt load should be compared to 3 things:

1) earning potential of the degree
2) job prospects/ history
3) personal preference (on debt).

3) I had no choice on the debt (other than to not go to college)
2) The job placement of my university was 99%. Was then, is now. Going to one of the best has its rewards. The other 1% generally went to graduate school.
1) Even if starting salaries are low (I chose a lower paying job because I liked the small company I was hired by), the earning power increases of the field mean more than the starting salary.

For example, I started at 39k with a Mechnical Engineering degree (school average the year I graduated was 47k with a range of 37k-65k as reported by my school to me).

I would assume a teacher would start slightly less and earn less over time.

If you compare the teacher to me, if the teacher had the same debt load with a lower salary- bad move on their part. In general if a person is going to follow a liberal arts track, they should minimize debt.

If a person is following a technology path, the debt is an issue, but more than likely most paths will be rewarded with salary growth. My salary has grown at a 6% annualized rate since I was hired (meaning salary doubles every 12 years). That is not a bad return.

[savingmama]

I agree with you Jim. You definitely have to consider not just what your initial salary is going to be, but also what your potential is in the short run. A lawyer starting out at $40,000 should definitely be able to double that within a few years. It sounds like Scrimpandsave's fiance's clerkship is similar what doctors do for residency. He is getting "training" still and with those skills he will definitely be able to raise his salary from $40,000 a year, no question. Scrimp's fiance's law schol debt isn't that absurd. Tuition can cost $30,000 a year. So I don't think it was frivilous spending on his part.

Now if you do buy a house scrimp, don't count on the money your fiance will eventually make, but when it does increase, it could give you some wiggle room for when/ if you decide to have kids and expenses go up. I was wondering with the clerkship your fiance is starting is it something that he wants to use as a springboard to get a job somewhere else, or does he plan to stay. I ask that because if you buy a house and then two year later decide he wants to relocate, that could be expensive if you bought. From your other posts, though, it sounds like you are planning to stay there for awhile.

[jIM_Ohio]

Originally Posted by savingmama

I agree with you Jim. You definitely have to consider not just what your initial salary is going to be, but also what your potential is in the short run. A lawyer starting out at $40,000 should definitely be able to double that within a few years. It sounds like Scrimpandsave's fiance's clerkship is similar what doctors do for residency. He is getting "training" still and with those skills he will definitely be able to raise his salary from $40,000 a year, no question. Scrimp's fiance's law schol debt isn't that absurd. Tuition can cost $30,000 a year. So I don't think it was frivilous spending on his part.

Now if you do buy a house scrimp, don't count on the money your fiance will eventually make, but when it does increase, it could give you some wiggle room for when/ if you decide to have kids and expenses go up. I was wondering with the clerkship your fiance is starting is it something that he wants to use as a springboard to get a job somewhere else, or does he plan to stay. I ask that because if you buy a house and then two year later decide he wants to relocate, that could be expensive if you bought. From your other posts, though, it sounds like you are planning to stay there for awhile.

I would agree that you should count on modest salary increases (3% per year) and not a salary doubling in 2-5 years when considering the house price/ mortgage amount.

Both times I purchased houses the first year was tight. Part of that the first time was not realizing what the tax benefits were (we moved in July and I did not understand how large a refund I would get until 16 months later in April almost 2 years later (needed a year with full mortgage payments).

Second time we closed in December and I was conservative on the adjustments to take home pay. Now it is opposite- we are quite aggressive and take home pay is nearly $800 higher on similar salaries from when we closed 3 years ago.

I say this because once you get into house and get comfortable, I think being young and aggressive makes sense. Take chances when you are young- not just with "investing", but with decisions like house purchase too.

[disneysteve]

Originally Posted by Fizgig

A good rule of thumb is that your total student load debt shouldn't exceed your first year's salary.

I can't say that I've heard that rule before. I can say that I don't think it is a very good rule.

I graduated with about $102,000 in debt. My first year salary AFTER residency (which was an additional 3 years after finishing school) was $65,000. My salary those first 3 years was in the $28,000-$32,000 range as I recall. Most loans were deferred during those years though not all of them.

You can't just look at the first year salary. You need to look at the typical salary progression as well. My first 3 years (residency) I made about 30K. My first year in practice I made 65K. Second year I made about 80K or so. By the 3rd year, I was over 100K and probably about 130K by 4th year (actually my 7th year after graduation). By that rule of thumb, my debt would have been considered way too high since it took me 6 years to earn as much as my debt.

Originally Posted by jIM_Ohio

A doctor might rack up 150-200k in loans over 8 years, maybe 10. They will need to pay off loans while they are in a residency or fellowship, even though the big payday would be after the 3 year fellowship is finished. The followship, I am guessing, pays 1/3 what the starting salary of a doctor really is.

I think that is all accurate enough, Jim. As I said, many loans can be deferred during post-graduate training, but some will need to be paid. And with some of the deferred ones, interest will accrue and be capitalized to the principal unless you pay it along the way.

As for community college, that may or may not be an option depending on the field. I'm not aware of any community college medical schools or law schools (please correct me if I'm wrong).

The other problem with that rule of thumb is it would require college students to have crystal balls and know years in advance what their future salaries will be. I started college in 1982. I graduated medical school in 1990 and finished residency in 1993. Obviously, in 1982 when I took out the first of many student loans, I didn't have a clue what my starting salary would be 11 years later. And that doesn't even begin to account for students who change their major and career choice mid-stream.