Pay off student loan or save for down payment?

[Andrew Jackson]

My initial thinking was that we would just gradual pay off our student loans over time and save our current savings for the purchase of a house in about two years. But now I'm not so sure.

We have one student loan at about $4,000 with an interest rate under 3%. Another student loan of $17,000 with an interest rate of 6.8%. Currently we have $24,000 and change in savings plus another $3,000 or so in a mutual fund. So all together we have $10,000 more than what we owe on the loan with the high interest rate. The monthly payment on the larger loan is $195 for 10 years. So $6,400 paid in interest if we take the whole 10 years.

We really want to buy a house the right way by saving up 20% which I figure will probably be about 40 to 50 thousand. We were on pretty good pace to hit the lower end of our savings goal within a year and a half. But obviously if we take a $17,000 hit to our savings we will be looking at a couple more years on top of that.

I'm content to just let the $4,000 loan sit. But am thinking it might be wise to pay off the $17,000 in full. Guaranteed 6.8 percent return. I imagine this would jump our credit score some too right? And will the jump still be visible 3-4 years down the road when we actually make the home purchase?

[YLTL_Dan]

We have one student loan at about $4,000 with an interest rate under 3%. Another student loan of $17,000 with an interest rate of 6.8%.

It's going to be quite painful, but I highly recommend knocking out all of the student loans. I would send the check tomorrow. Purchasing and maintaining a home is a very expensive process, and your additional debts should be minimized (or wiped out) before you jump into it.

After you pay off your student loans, you can add the $250/month extra to your "home" savings account. If you're serious about saving for a house, tighten up your budget and see what you can do to hit your savings goals faster. You can check out my OWN IT plan, or use the Dave Ramsey plan if you haven't already.

I'll leave the credit score question for someone else as I'm not sure what the long term effects will be. It should definitely raise in the short term, but it might actually negatively impact it in the long term because you don't have regular debt payments. However, if you have 20% saved, you can easily get a traditional mortgage without worshipping the FICO.

[Andrew Jackson]

I'll leave the credit score question for someone else as I'm not sure what the long term effects will be. It should definitely raise in the short term, but it might actually negatively impact it in the long term because you don't have regular debt payments. However, if you have 20% saved, you can easily get a traditional mortgage without worshipping the FICO.

Thanks for the advice.

We don't have any car payments so the loans are the only regular debt payments that we have. I also heard that having a regular debt payment helps your credit so maybe that would be another reason to not pay off the smaller loan. But as you said it maybe the FICO won't matter much since we will put 20% down.

[bjl584]

My initial thinking was that we would just gradual pay off our student loans over time and save our current savings for the purchase of a house in about two years. But now I'm not so sure.

We have one student loan at about $4,000 with an interest rate under 3%. Another student loan of $17,000 with an interest rate of 6.8%. Currently we have $24,000 and change in savings plus another $3,000 or so in a mutual fund. So all together we have $10,000 more than what we owe on the loan with the high interest rate. The monthly payment on the larger loan is $195 for 10 years. So $6,400 paid in interest if we take the whole 10 years.

We really want to buy a house the right way by saving up 20% which I figure will probably be about 40 to 50 thousand. We were on pretty good pace to hit the lower end of our savings goal within a year and a half. But obviously if we take a $17,000 hit to our savings we will be looking at a couple more years on top of that.

I'm content to just let the $4,000 loan sit. But am thinking it might be wise to pay off the $17,000 in full. Guaranteed 6.8 percent return. I imagine this would jump our credit score some too right? And will the jump still be visible 3-4 years down the road when we actually make the home purchase?

It's not quite 6.8% guaranteed return because you can write off part of the interest on the student loans.

I would look at your overall budget. Are you able/willing to service student loan debt and a mortgage at the same time? If so, then save up your 20% and buy. If not, then I would focus on knocking out the student loans even if it meant waiting a little longer to buy a home.

You could always do a mix of both. Save up for a house and pay down the loans. Then, do a refi on the student loans just before you buy a house.

[DebbieL]

Personally I would pay off the 6.8% student loan, but I would just continue making whatever payment you currently make on the smaller (low interest) loan. I would take the money that was going to the larger student loan and add that to my house savings.

As far as I know, just having monthly bills that you pay on time will help build up your credit score. It doesn't all have to be loans. If you have utilities in your name, etc, that should help.

[snafu]

Congratulations on limiting debt to student loans. I too suggest paying off the larger student loan since housing prices have not stabilized and [depending your area] will likely continue to drop for the next year. the government has repeatedly stated interest rates will not increase for the next two years.

My tendency would be to save more aggressively for two years but know you will take the action that makes sense watching the economy in your specific community. The majority of those in foreclosure got there by buying or financing more house than they could afford.

[Andrew Jackson]

It's not quite 6.8% guaranteed return because you can write off part of the interest on the student loans.

I would look at your overall budget. Are you able/willing to service student loan debt and a mortgage at the same time? If so, then save up your 20% and buy. If not, then I would focus on knocking out the student loans even if it meant waiting a little longer to buy a home.

You could always do a mix of both. Save up for a house and pay down the loans. Then, do a refi on the student loans just before you buy a house.

Do they re-finace student loans? If they do maybe we could make a $10,000 payment and refinance into a 3% loan.

I don't think having the student loan debt and the mortgage payment will be overwhelming for us. We are looking to put 20% down on a modest home. We would like to have the mortgage payments no more than our current rent which is around $1,000.

[Shewillbemine]

Be careful refinancing or consolidating student loans. Although you can benefit from lower interest rates and the convenience of paying to only one debtor, defaulting to a consolidator will be equivalent to defaulting on credit card payments. You will have no deferral options and they can go after you in a more vigorous, legal manner.

It would be silly to go buying a house while holding on to any significant amount of debt. Sure, you can physically pay for both a mortgage and student loan payments, but why bother? This is all assuming that you and your partner stay in good health and employed. What happens in something unfortunate occurs and you're on the hook for loans and the mortgage?

Houses will be affordable for quite a long time and it's best not to get hooked into more debt. When you buy your house, do you think you'll be living in empty rooms? Believe me, you'll want to buy furniture, paint, appliances, electronics, gardening tools, etc. EVERY new purchase begets MORE new purchases.

Like everyone else has suggested, the smarter option is to pay off all loans/debt first. The only reason you would not do this is because you simply feel differently, but it's not rational nor the better thing to do.

[Eric80]

This is tough as it would take a massive burden from you, and it will increase your credit scores as well as the position your are in financially. I think that if you can hold out before you buy your first house then do that as this would make your life easier - if you're still unsure then maybe go and see your citizens advice bureau.

[bdoubleu]

Do they re-finace student loans? If they do maybe we could make a $10,000 payment and refinance into a 3% loan.

I don't think having the student loan debt and the mortgage payment will be overwhelming for us. We are looking to put 20% down on a modest home. We would like to have the mortgage payments no more than our current rent which is around $1,000.

As far as I know, "they" do not refinance student loans, unless they are private loans.

I'm sure many may frown upon this, but we "refinanced" our student loans using a credit card balance transfer. The student loans were about $18,000 at 6.8%, and the balance transfer cost a 3% fee on the amount we transferred. So we payed a transfer fee of about $500, and have 0% interest until July 2013. We make enough and live below our means, so that we will easily be able to afford to pay off the credit card balance transfer by July 2013, and we will have saved a few hundred dollars in interest.

[ProjectX]

That's a pretty high interest rate. Looks like you have a nice chuck of cash. I wouldn't suggest using a large portion of the next egg to pay off the student loan.

Personally I would cuts costs to the bare minimum, stop putting money into your savings and mutual fund, but keep that cash on hand for emergencies and in case you lose your job. Focus on making large monthly payments towards the student loans (maybe pay it off in 12 months).

Then re focus your attention on the Goal to save for a house. A house comes with a lot of added expenses. I wouldn't suggest purchases a home with too much debt.

Also, based on your income you can also claim your student loan interest on your taxes.