As many of you know I have a day job as a Mortgage Advisor. In addition to my day job, I enjoy sharing my voice in the personal and business finance space. As of lately, I have started to reflect on the question of should someone who has college debt, first pay-off all your student loan debt and then save for a home, or should you continue to pay what you can toward your student loans, and save for a home purchase at the same time. I know what you are thinking, but you are all about Dave Ramsey and Financial Freedom and eliminating debt- Amber, how is this even an option for me to consider? Let me explain:
Debt is nasty do not get me wrong. As a general rule of thumb I would say, get rid of your debt as fast as you can. However, there are different types of debt, we as consumers, have access to in our economy. There are three types of debt; secured, unsecured and mortgage debt. An easier way to understand these debt categories is by considering the types of debt you may have in your name. Education Debt, Consumer Debt, and Equity Building Debt.
Education Debt: This debt is what the name says, it is debt that is linked to your educational journey. This could be debt that is secured or unsecured, but it is linked to provide funds for your education.
Consumer Debt: This debt is tied to a product or service that you used credit to complete the purchase This could be purchases you made on your Credit Cards, or an auto loan.
Equity Building Debt: This is debt that is taken out in your name that has the ultimate goal of building equity. There are two ways this can build equity for you, the first way is the portion of the payment that is the principle payment. These funds go to pay down the loan principle that ultimately will be available to you should the asset maintain or gain in value. The second way is if there is a growth in appreciation. If the asset the debt is tied to grows in value you can recoup this equity in the form of cash.
Now that you know the foundation of the types of debt that are accessible in our economic system. It is time for us to address the main question. Should you first pay off your debt and then save, or pay off as you can and save at the same time. According to Experian, an industry leading credit reporting agency, states "the total amount of outstanding student loan debts have reached an all-time high of 1.41 trillion. "This is a combination of 44 million borrowers, which is 69% of all students"-cnbc.com. That is a lot of people living with educational debt. In conjunction to the debt load of these students, the average annual salaries for students who graduate from a 2 year education is $41,528 and a 4 year is $47,393 in their first year of employment post graduation, according to Minnesota Office of Higher Education.
Let me break down these stats a bit further for you. If the average graduating student has $32,000 in their name with an average of 4.53% interest rate on those loans then the student has a minimum payment of $332/month to just pay the interest on this debt. With the average income being $44,000 in MN that equals ~$3,705 gross income per month.
Fast forward, to the day that the $32,000 or $64,000 total debt for a married couple is paid off by the time you are 32 years old and their income has grown 3% over the 5 years post graduation. This would convert their $44,000 each into now combined they are making ~$100,000 annually. There is now less debt and greater income for their future home purchase. However, they are now 32 years old, have zero debt, but they also do not have liquid cash for a down payment.
So what would I do with my, hypothetical student loan debt, if I was faced with these statistics? I would do the following three steps:
Step 1-Evaluate ones heart posture toward money: This is KEY! Our heart posture toward money and money management is key. If I had debt that is on a credit card, I would NOT consider the option of looking to purchase a home while still having student loan debt. However, if I only had a minimal car payment or better yet, no car payment at all and student loan debt I would then consider my options of not paying it all off yet. The reason I would look into this option, based on my heart posture, is because I know I would have the ability to maintain a healthy money-debt relationship with a new equity building debt.
Step 2-Evaluate the current market: At the time of writing this post, interest rates are almost at the lowest they have been since 2016. In addition, home values are still considered affordable compared to other states, which makes renting and owning a comparable price. With these two factors being as they are, buying now could be a great option for me considering my heart posture. In addition to the current market, the current 'First Time Home-buyer benefits' can have factors that require the qualified borrowers to have a median income that is less than or equal to the programs median income. These programs can help with getting a great interest rate.
Step 3-Evaluate my budget and how I am saving: Reviewing my hypothetical budget given the above statistics - Income of $3,000 monthly net minus $1500 for rent, $333 interest toward student loans, $250 groceries, $200 misc/lifestyle, $100 auto loan, $150 utilities, $200 for 3-6 months saving, $200 bonus toward student loans. $150 auto insurance & misc. This would allow me to still save, pay down my loans and live comfortably. Of course double these if you are married and have joint income.
If I was to wait until my debt was paid off and the average income I am making pushed me outside the 'first time home-buyer' programs available. If this were to happen, I might end up with a higher interest rate on my 30 year home mortgage than the average amount I was paying on my loans, which would be a net negative benefit for my net worth. Rates are good right now allowing one to possibly have a net gain as they prioritize their spending. However, they might not always be this good. If you are contemplating buying now or continuing to pay off your loans. I would recommend you going through the Evaluation Steps above to determine if purchasing while moderately paying off your loans is an option that fits your financial story best. However, if you can not honestly trust yourself with Step #1, this will not be a wise decision for you.