Student Loans Vs Mortgage

[Singuy]

I brought up something interesting the other day with my co-workers on the importance of paying off student loans vs a mortgage.

My co-workers usually have gone through higher education so their student loans can sometime rival or be equal to a mortgage.

Lets say if one has 150k worth of mortgage (3.7% interest) and 150k worth of student loans(interest 6.8%).

If you want to be debt free, most will tackle the student loans first because
1. Stays with you for life
2. Higher interest rate.


My argument was..maybe pay off that mortgage first for future proof.

Everyone now has a steady income, but what if something terrible happens to you in 5 years which leads you depending on a wheelchair and can no longer work.

In this 5 years, you decided to

Scenario 1. Student loans fully paid off, have 100k left on mortgage. EF now ran out, can't make mortgage payments..about to be forclosed.

Scenario 2. Mortgage paid off, apply for property tax disability exemption which exempts you from all property taxes. Slowly drain EF, stop student loan payment by applying for income based payment (since income is 0, you don't have to pay). You may be able to live off social security disability with no mortgage and no property tax.

The point is, in scenario 2, you really didn't lose a houes you paid so much into(like your downpayments, and all those years you worked toward that mortgage) for while in scenario 1, you are vunerable to losing a house.

Thoughts?

[disneysteve]

Sorry but I don't think that makes any sense.

1. Very few people can pay off a $150,000 mortgage (or $150,000 student loan) in 5 years so your entire scenario is pretty much a fantasy. For almost everyone, 5 years in they will have paid a bunch of interest and very little principal on the mortgage.

2. It is always mathematically better to pay the highest interest debt first.

3. If you are concerned about potential disability, which is a reasonable concern, the way to protect yourself is with disability insurance.

[Joan.of.the.Arch]

As a single person Social Security Disability payments can only be received if you have no more than $2000 savings. If married, your household can have $3000 in savings. So there can be no slowly using up some mega emergency fund while collecting Disability. http://www.socialsecurity.gov/ssi/te...urces-ussi.htm

Where do you live that a disability exempts you from property tax? In my state the maximum exemption is $1100.

http://dor.mo.gov/personal/ptc/

I do empathize with your desire to secure a place to live regardless of what may come in the future. Wise motivation.

[Singuy]

Sorry but I don't think that makes any sense.

1. Very few people can pay off a $150,000 mortgage (or $150,000 student loan) in 5 years so your entire scenario is pretty much a fantasy. For almost everyone, 5 years in they will have paid a bunch of interest and very little principal on the mortgage.

2. It is always mathematically better to pay the highest interest debt first.

3. If you are concerned about potential disability, which is a reasonable concern, the way to protect yourself is with disability insurance.

For someone with higher education, it is VERY easy to pay off 150k in student loans or mortgage in 5 years with a yearly income of 120k or so. It's not a fantasy world..I've paid off a 300k mortgage in 7 years with a 120k salary and my wife paid off her 170k worth of student loans in 2.5 years with a 150k salary. You just have to live like a college student until you meet your goal.

My after tax money was around 6k/month, and I put 4.5k toward my mortgage and live off the rest..then have those extra paychecks you get twice a year(biweekly payroll) as your EF. 7 Years later, 300k paid off, 120k in 401k..net worth of 420k.

Savings is not considered at least in the state of FL when it comes to disability social security. My dad is on it due to renal failure and he had way more than 2k in the bank at the time. Also in the state of FL, property tax is fully exempt ONLY if your disability involves a wheelchair.

My argument is this, they can take away your house, but they can't force you to pay student loans...what do they have as collateral? Your knowledge?

[Joan.of.the.Arch]

Unlike some federally funded programs, I don't think Social Security Disability is administered by the individual states. Perhaps the state of Florida has its own disabilty income assurance for people with severe kidney disease. My state has its own supplemental income for people with blindness, so maybe Florida has set something up analogously for people with kidney disease.

[autoxer]

1. Very few people can pay off a $150,000 mortgage (or $150,000 student loan) in 5 years so your entire scenario is pretty much a fantasy. For almost everyone, 5 years in they will have paid a bunch of interest and very little principal on the mortgage.

Don't be so negative. Like singuy said, with a good salary and living sufficiently below your means, that can easily be done. And you certainly shouldn't be racking up $150k in debt for a degree that can't earn a good salary.

2. It is always mathematically better to pay the highest interest debt first.

3. If you are concerned about potential disability, which is a reasonable concern, the way to protect yourself is with disability insurance.

I agree with these comments completely. If you are concerned about disability, then disability insurance is a better choice, then hedging your bets by paying off the mortgage and defaulting on the student loans. I don't know what happens when you default on your student loans, but it wouldn't surprise me if they garnish your disability social security income.

[Singuy]

Don't be so negative. Like singuy said, with a good salary and living sufficiently below your means, that can easily be done. And you certainly shouldn't be racking up $150k in debt for a degree that can't earn a good salary.


I agree with these comments completely. If you are concerned about disability, then disability insurance is a better choice, then hedging your bets by paying off the mortgage and defaulting on the student loans. I don't know what happens when you default on your student loans, but it wouldn't surprise me if they garnish your disability social security income.

If you have federal loans, then you can apply for income based payments which actually states in their chart that if you make below a certain income, you DO NOT have to pay your student loans without defaulting..and it's forgiven after 25 years.

If you have private loans, then default...nothing will happen to you (besides trashing your credit and getting phone calls from debt collectors)..and after 5 years they can't even come after you anymore.

[disneysteve]

If you have federal loans, then you can apply for income based payments which actually states in their chart that if you make below a certain income, you DO NOT have to pay your student loans without defaulting..and it's forgiven after 25 years.

If you have private loans, then default...nothing will happen to you (besides trashing your credit and getting phone calls from debt collectors)..and after 5 years they can't even come after you anymore.

Or just buy disability insurance and don't worry about all of this or sit around planning "strategic" default methods.

[Singuy]

Or just buy disability insurance and don't worry about all of this or sit around planning "strategic" default methods.

What if you lost your job and have a hard time getting a new one?

Or you end up with a much lower paying job or working part time to the point where you can't afford the mortgage? What if you were charged with a DUI and no employer will hire you because you have a record?

With the 2007 recession, I saw a lot of high paying workers being laid off and then foreclosed on their houses. Who to say this wouldn't happen again?

**** happens and not everything can be covered by diability insurance.

[autoxer]

I've never considered strategic default with any of my decisions, but if you are going to go through bankruptcy, isn't student loan debt the worst kind to have?

[disneysteve]

What if you lost your job and have a hard time getting a new one?

That's what my EF is for.

Or you end up with a much lower paying job or working part time to the point where you can't afford the mortgage?

If your situation changes to where you can't afford to keep your home then you sell it and buy one that you can afford. Cheaper home also comes with lower carrying expenses which would be important in that situation as well.

What if you were charged with a DUI and no employer will hire you because you have a record?

Sorry but that one would be your own damn fault for doing something as incredibly stupid as drinking and driving. If you are planning ahead how to deal with that, there's a serious problem.

With the 2007 recession, I saw a lot of high paying workers being laid off and then foreclosed on their houses. Who to say this wouldn't happen again?

Absolutely true. However, also consider that many of the people who lost their homes bought homes that were way out of their budget, put nothing down, did interest-only loans, etc. So a good number of those foreclosures were the result of poor financial decisions. Not all of them for sure but a lot of them.

**** happens and not everything can be covered by diability insurance.

True. That's why it is vital to have a fully funded EF and live well below your means so that when stuff does go wrong, you're prepared to deal with it.

Look if you want to put paying off your mortgage ahead of paying off your student loans, I don't have a problem with that. It is all of the reasons for doing so that you've given that I take issue with.

[Singuy]

That's what my EF is for.


If your situation changes to where you can't afford to keep your home then you sell it and buy one that you can afford. Cheaper home also comes with lower carrying expenses which would be important in that situation as well.


Absolutely true. However, also consider that many of the people who lost their homes bought homes that were way out of their budget, put nothing down, did interest-only loans, etc. So a good number of those foreclosures were the result of poor financial decisions. Not all of them for sure but a lot of them.


True. That's why it is vital to have a fully funded EF and live well below your means so that when stuff does go wrong, you're prepared to deal with it.

Look if you want to put paying off your mortgage ahead of paying off your student loans, I don't have a problem with that. It is all of the reasons for doing so that you've given that I take issue with.

Fully funded EF will not solve everything.

A lot of people paid 50-100k more for what their house was worth because that was the market, and no one thought house value can go DOWN. I remember putting 4.5k/month toward my mortgage and STILL had NEGATIVE equity in my house when prices hit rock bottom...it was That BAD! So the thought of selling your house and move into a smaller one is a fantasy when you have negative or little equity on a 30 year mortgage(as you said, you paid mostly interest the first 5 years).

Your EF can keep you afloat for 6 months, but what about 2 or 4 years? I have yet to see why the strategy I have put forth is a problem.

If foreclosures are not a thing, then sure pay off the higher interest loans first.

[disneysteve]

I have yet to see why the strategy I have put forth is a problem.

I don't think paying the mortgage first and then the student loans is a problem. I don't happen to think it's the best option but it would certainly work. I'm happy to agree to disagree on some of the other issues you raised.

[doingitallwrong]

My argument is this, they can take away your house, but they can't force you to pay student loans...what do they have as collateral? Your knowledge?

For a Federal loan, they can garnishee your wages, your tax refunds, or your Social Security/SS Disability benefits. There is no statute of limitations on Federal student loan debt.

If you have federal loans, then you can apply for income based payments which actually states in their chart that if you make below a certain income, you DO NOT have to pay your student loans without defaulting..and it's forgiven after 25 years.

The remaining balance is forgiven after 25 years in an IBR plan. (Your payment amount may still be $0, but still have to officially enroll in the plan.)

If you have private loans, then default...nothing will happen to you (besides trashing your credit and getting phone calls from debt collectors)..and after 5 years they can't even come after you anymore.

A private lender can seek a judgment, which if they win means they can garnishee your wages. They cannot touch your tax refunds or Social Security benefits. The statute of limitations varies by state and may be up to 15 years.