Finally Wipe Out Student Loans? Save for House?

[misterhalibut]

UPDATE: We did it! We paid off the entire remaining balance of all our student loans today (~$40,000). After capitalization of interest on our student loans, we started in late 2014 with $104,644.27 in student loans and ~$18,000 in car debt, for a total of ~$122,600 in stupid debt. We didn't wake up to the emergency of our debt (thanks in large part to MMM and Dave Ramsey) until late 2016. From December 2016 to January 2018 (about 14 months), we paid off just under $94,000 in debt.

We have also taken the advice from the insightful MMM followers below, and are maxing out tax-advantaged accounts before saving aggressively for a down payment on a house, hopefully by the end of the year. Thank you to those of you who took the time to read and provide some feedback. It was very helpful.

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Hi, everyone. I have been lurking and reading for quite some time.  I am hoping to get some feedback on whether my wife and I are making a good decision in the long run by paying off the balance of my student loans from law school. Here are some background facts:

Income
Annual gross income (2017): ~$218,000
Annual take home (2017): ~$162,000
Expected annual gross income (2018): ~$240,000
Expected annual take home (2018): ~$165,000

Notes: The modest difference in expected take home for 2018 compared to actual take home in 2017 (relative to substantial increase in gross income) is mostly attributable to increased expected contributions to 401(k) and HSA accounts in 2018.

Debt
All debt is student loans (no cars, no credit cards). Current balances/interest rates:
(1) $15,970.08 @ 5.41% (min. monthly pmt. = $233.91)
(2) $15,485.45 @ 6.8% (min. monthly pmt. = $237.24)
(3) $8,524.94 @ 7.9% (min. monthly pmt. = $204.81)

Total principal balance: $39,980.47

Notes: In December 2016, we decided to aggressively pay off our debts, with the goal of paying everything off between December 2017 and February 2018. At the time (December 2016), we had ~$83,000 in student loans and ~$10,000 on a car note. From December 2016 to June 2017, we paid off ~$50,000 in debt. In June 2017, we decided to increase our cash and have not applied any big chunks to student loans. We still have a very strong desire to get rid of all of our debt, but I am hoping to get some feedback as to whether this is a good idea (see additional facts below regarding purchasing a house and having another child).

Liquid Assets
We have the following amounts in our checking and savings accounts that we would be willing to apply to the student loans:
Checking: ~$28,000 (A bonus was paid yesterday, which is the main driver for this whole question of whether to wipe out the student loans. Our checking account does not normally have this much.)
Savings: ~$22,500

Total: ~$50,500

Notes: We have very modest retirement at this point (~$40,000) (we are in our early 30's so we want to go crazy on retirement savings very soon). We also have an HSA that will cover the costs of our third child (see below).

Additional Facts
We currently rent and have since we got married in 2008. We are extremely eager to buy a house. We have two small children (ages 6 and 2). We are also expecting our third in early May (as mentioned above, costs associated with the birth are already covered through savings in an HSA). Our lease is up in June, so we are planning on buying a house at that time. Price range based on location (very close to work) is between $320,000 - $400,000. Currently, renting compared to buying is pretty similar, with a slight edge to buying (based mostly on using the NY Times calculator referred to in MMM’s post about the costs of renting versus buying). We plan to stay here for 5-10 years. My job is very stable, and I love it. My wife stays at home with our kids.

I am also able to provide categorical spending history if helpful.

All along, we have been planning on putting the money we saved since June 2017 to the student loan debt, but now that we are bumping up against buying a house and having another child, I am somewhat nervous. I am wondering if it would be better to save for a larger down payment on a house (or something else). I would really appreciate any and all feedback.

[mozar]

Those interest rates are pretty high. I would pay off the student loans, max out your 401k, then save up 20% for the house plus extra for maintenance for however long that takes. You didn't say whether it's cheaper to rent or buy in your area or long you intend to stay, but as the sole bread winner I would be cautious.

[MrUpwardlyMobile]

Hi, everyone. I have been lurking and reading for quite some time.  I am hoping to get some feedback on whether my wife and I are making a good decision in the long run by paying off the balance of my student loans from law school. Here are some background facts:

Income
Annual gross income (2017): ~$218,000
Annual take home (2017): ~$162,000
Expected annual gross income (2018): ~$240,000
Expected annual take home (2018): ~$165,000

Notes: The modest difference in expected take home for 2018 compared to actual take home in 2017 (relative to substantial increase in gross income) is mostly attributable to increased expected contributions to 401(k) and HSA accounts in 2018.

Debt
All debt is student loans (no cars, no credit cards). Current balances/interest rates:
(1) $15,970.08 @ 5.41% (min. monthly pmt. = $233.91)
(2) $15,485.45 @ 6.8% (min. monthly pmt. = $237.24)
(3) $8,524.94 @ 7.9% (min. monthly pmt. = $204.81)

Total principal balance: $39,980.47

Notes: In December 2016, we decided to aggressively pay off our debts, with the goal of paying everything off between December 2017 and February 2018. At the time (December 2016), we had ~$83,000 in student loans and ~$10,000 on a car note. From December 2016 to June 2017, we paid off ~$50,000 in debt. In June 2017, we decided to increase our cash and have not applied any big chunks to student loans. We still have a very strong desire to get rid of all of our debt, but I am hoping to get some feedback as to whether this is a good idea (see additional facts below regarding purchasing a house and having another child).

Liquid Assets
We have the following amounts in our checking and savings accounts that we would be willing to apply to the student loans:
Checking: ~$28,000 (A bonus was paid yesterday, which is the main driver for this whole question of whether to wipe out the student loans. Our checking account does not normally have this much.)
Savings: ~$22,500

Total: ~$50,500

Notes: We have very modest retirement at this point (~$40,000) (we are in our early 30's so we want to go crazy on retirement savings very soon). We also have an HSA that will cover the costs of our third child (see below).

Additional Facts
We currently rent and have since we got married in 2008. We are extremely eager to buy a house. We have two small children (ages 6 and 2). We are also expecting our third in early May (as mentioned above, costs associated with the birth are already covered through savings in an HSA). Our lease is up in June, so we are planning on buying a house at that time. Price range based on location (very close to work) is between $320,000 - $400,000. My job is very stable, and I love it. My wife stays at home with our kids.

I am also able to provide categorical spending history if helpful.

All along, we have been planning on putting the money we saved since June 2017 to the student loan debt, but now that we are bumping up against buying a house and having another child, I am somewhat nervous. I am wondering if it would be better to save for a larger down payment on a house (or something else). I would really appreciate any and all feedback.

Pay off the student loans. Those rates are high. If you want to refinance to a lower rate and pay over 12 months, send me a PM about Earnest, citizens bank or SoFi.  In your case, I think paying faster is better. Refinancing wouldnt really save you much in the next few months. 

Max out your 401k contribution, make your annual backdoor Roth IRA contribution, and max HSA.  AFTER you’ve done those things, then save for the house.  You’re in a solid position for a lawyer, knock out the debt, get your tax advantages savings in order and then save for the house,  your situation is basically mine in 18 months (though you have more kids and I have more savings)

[misterhalibut]

Those interest rates are pretty high. I would pay off the student loans, max out your 401k, then save up 20% for the house plus extra for maintenance for however long that takes. You didn't say whether it's cheaper to rent or buy in your area or long you intend to stay, but as the sole bread winner I would be cautious.

Thanks for your insights. The original post has been modified regarding costs to rent versus buy (slight edge to buy) and how long we intend to stay (5-10 years). I tend to agree with your advice to be cautious. We have bounced around to four different houses/apartments over the last four years. It is getting old, and it seems like each year we tell ourselves, “we will rent for one more year.” I never thought we would be looking for houses costing upwards of $400k (it seems so absurd to me). We may consider a different area that is a little cheaper, but doing so would put us farther away from work. I commuted 45+ minutes for a few years, and it was very tiresome. It is important to us to remain close to work (no more than 15 minute drive, no highways/freeways).

Again, thank you very much for taking the time to respond.

[misterhalibut]

Pay off the student loans. Those rates are high. If you want to refinance to a lower rate and pay over 12 months, send me a PM about Earnest, citizens bank or SoFi.  In your case, I think paying faster is better. Refinancing wouldnt really save you much in the next few months. 

Max out your 401k contribution, make your annual backdoor Roth IRA contribution, and max HSA.  AFTER you’ve done those things, then save for the house.  You’re in a solid position for a lawyer, knock out the debt, get your tax advantages savings in order and then save for the house,  your situation is basically mine in 18 months (though you have more kids and I have more savings)

Thanks for your feedback. I think that if we do decide not to pay off the loans, I would consider refinancing. However, the very thought of extending the loans out for another 12 months (or more) makes me shudder. We have put a lot of effort into getting them paid down quickly and it would feel disappointing to continue to see them on our balance sheet for that long. That being said, I am open to other thoughts if they are compelling enough, which was the intent of my original post.

I’m wondering if you would be willing to give me your thoughts on delaying maxing out all tax-advantaged savings until after we buy a house (I have read several articles encouraging maxing out tax-advantaged accounts before saving a down payment, so I am generally familiar with the basic reasoning). My law firm matches 3% as long as I contribute at least 6% (matching contributions are uncommon for law firms). We are currently only contributing 6% and do not have any IRAs. My thought was to aggressively save a down payment for a house in six to eight months (10%-15% of purchase price), finish out a decent emergency fund and then max out retirement savings + other savings (and/or put extra towards the mortgage until we can get rid of PMI). I think a reasonable estimate for us to begin the “max+” savings would be first part of next year. Do you see anything extremely bad about this suggested timeline?

Thanks for your time and consideration. I really do appreciate it.

[MrUpwardlyMobile]

Thanks for your feedback. I think that if we do decide not to pay off the loans, I would consider refinancing. However, the very thought of extending the loans out for another 12 months (or more) makes me shudder. We have put a lot of effort into getting them paid down quickly and it would feel disappointing to continue to see them on our balance sheet for that long. That being said, I am open to other thoughts if they are compelling enough, which was the intent of my original post.

I’m wondering if you would be willing to give me your thoughts on delaying maxing out all tax-advantaged savings until after we buy a house (I have read several articles encouraging maxing out tax-advantaged accounts before saving a down payment, so I am generally familiar with the basic reasoning). My law firm matches 3% as long as I contribute at least 6% (matching contributions are uncommon for law firms). We are currently only contributing 6% and do not have any IRAs. My thought was to aggressively save a down payment for a house in six to eight months (10%-15% of purchase price), finish out a decent emergency fund and then max out retirement savings + other savings (and/or put extra towards the mortgage until we can get rid of PMI). I think a reasonable estimate for us to begin the “max+” savings would be first part of next year. Do you see anything extremely bad about this suggested timeline?

Thanks for your time and consideration. I really do appreciate it.

. The saving for a house is something you can catch back up on. You have less savings than you should for retirement and can only put in so much per year.  If you forego adding to retirement accounts now, that’s it. You don’t get to add retroactively.  You do get to save as much as you want for a house in any year.  By prioritizing a house now, you’re basically robbing yourself to rush into home ownership. 

Your strategy is not only inefficient from an opportunity cost perspective, it’s mathematically ineffective since home savings will likely go into a low interest savings account versus retirement savings that will average far better returns.

As for law firms not matching, maybe that’s a regional thing. I’ve only seen one firm in my area that didn’t match 4% for your 5%.   It’s pretty standard because of the safe harbor plan rules that law firms typically use.

You can go your route, just remember that you are prioritizing home ownership over efficiency, long term financial stability, and more money.  Based upon the childres’ ages, your remaining debt, and low savings, it sounds like you’re a bit behind the 8 ball.  The only way to catch up is to start now.

[slappy]

My understanding has always been that if you are not planning to stay for at least 7 years or so, it doesn't make sense to buy because of the transaction costs involved. You say you are planning to stay for 5-10 years. Then what? Are you planning to move out of the area? Based on everything you've said, renting makes sense. Why are you guys bouncing around so much? Can you find a place that meets your current needs and the needs of the forseeable future?

Also, if your baby is due in May and your lease is up in June, that doesn't seem like the best time to be house hunting/buying.

[nereo]

This is a no-brainer.  Use the money in your checking account to pay off loans (3) and (2) right away. 
Keep enough in your savings to have an Emergency Fund to your satisfaction.†
Use whatever is left to eliminate the final loan in short order.

Once those are gone and with your high incomes you will be able to save 20% for a down payment rather quickly (~ 12 months). However, don't ignore your tax-advantaged accounts (e.g. 401(k)) to save for the down payment - at your income level the tax savings will overrule any benefit you get from moving into your 'own' home a few months earlier.

†Emergency funds are person-specific.  However, you have only moderate savings and currently no access to a HELOC, so weigh your job stability with your ability to pay for a truly unexpected set of expenses.  Consider what would happen if you were injured or fell ill.

[Wayward]

Thanks for your feedback. I think that if we do decide not to pay off the loans, I would consider refinancing. However, the very thought of extending the loans out for another 12 months (or more) makes me shudder. We have put a lot of effort into getting them paid down quickly and it would feel disappointing to continue to see them on our balance sheet for that long. That being said, I am open to other thoughts if they are compelling enough, which was the intent of my original post.

I’m wondering if you would be willing to give me your thoughts on delaying maxing out all tax-advantaged savings until after we buy a house (I have read several articles encouraging maxing out tax-advantaged accounts before saving a down payment, so I am generally familiar with the basic reasoning). My law firm matches 3% as long as I contribute at least 6% (matching contributions are uncommon for law firms). We are currently only contributing 6% and do not have any IRAs. My thought was to aggressively save a down payment for a house in six to eight months (10%-15% of purchase price), finish out a decent emergency fund and then max out retirement savings + other savings (and/or put extra towards the mortgage until we can get rid of PMI). I think a reasonable estimate for us to begin the “max+” savings would be first part of next year. Do you see anything extremely bad about this suggested timeline?

Thanks for your time and consideration. I really do appreciate it.

. The saving for a house is something you can catch back up on. You have less savings than you should for retirement and can only put in so much per year.  If you forego adding to retirement accounts now, that’s it. You don’t get to add retroactively.  You do get to save as much as you want for a house in any year.  By prioritizing a house now, you’re basically robbing yourself to rush into home ownership. 

Your strategy is not only inefficient from an opportunity cost perspective, it’s mathematically ineffective since home savings will likely go into a low interest savings account versus retirement savings that will average far better returns.

As for law firms not matching, maybe that’s a regional thing. I’ve only seen one firm in my area that didn’t match 4% for your 5%.   It’s pretty standard because of the safe harbor plan rules that law firms typically use.

You can go your route, just remember that you are prioritizing home ownership over efficiency, long term financial stability, and more money.  Based upon the childres’ ages, your remaining debt, and low savings, it sounds like you’re a bit behind the 8 ball.  The only way to catch up is to start now.

+1 to MrUpwardlyMobile.  Prioritizing debt payoff/home ownership at the expense of tax-advantaged savings is not the most efficient choice.  Do the math and go with your brain, not your emotions!

1. If you don't already, start tracking your spending (Excel, notepad, Mint, YNAB, whatever works for you) and optimize your spending/flexing your frugality muscles ;)

2. Refinance the student loans if you can get a really great rate (under 5%), with your income and low debt you should be able to.  I have student loans also, and a much lower income, so I understand wanting to kill them now now now.  But is your goal to be debt free or is it to be financially free?  You can't get back the lost time maxing out your 401k/IRAs and the tax savings could really help at your income.

3. With your bonus max out at least 2017 IRAs for you and your wife (still possible now until April).  With the remaining bonus you could also max out 2018 IRAs (or take a hybrid approach and pay off loan #3 if you really don't want to refinance).  I would be maxing out a traditional 401k and IRAs each year!  Follow: https://forum.mrmoneymustache.com/investor-alley/investment-order/msg1333153/#msg1333153

See this article: http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/
His stock series is also really helpful!

[misterhalibut]

Thanks, everyone. We decided to move forward with paying off the entire balance (~$40,000) and have already authorized the transaction. After capitalization of interest on our student loans, we started in late 2014 with $104,644.27 in student loans and ~$18,000 in car debt, for a total of ~$122,600 in stupid debt. We didn't wake up to the emergency of our debt (thanks in large part to MMM and Dave Ramsey) until late 2016. From December 2016 to January 2018 (about 14 months), we paid off just under $94,000 in debt. It feels AMAZING to be finished!

We also revisited our projected 2018 budget (in response to Wayward, we have been tracking expenses on Mint and making annual and monthly budgets on Excel spreadsheets for years). There really is no excuse for us to not max out all tax-advantaged accounts, so we decided to take everyone's advice there. I still think we should have the ability to save a sizable down payment before the end of the year or by early next year at the latest. I really appreciate everyone's face-punching in that regard!

[simonsez]

Congrats Mr. H!  That's great to hear.