Pay off Student Loans, or Save for House?

Ahhhh, the good old “pay off debt vs. save for X” debate. Gets me teary eyed every time ;) Got an email from a reader, and thought it would be better to hear from all of you rather than just me – esp. since I’m sorta anti-home owning at the present time. Well, kinda, but not really…

Anyways, here’s what Mrs. Debater asks:

“I am debating on whether to save up $$ toward a down payment on buying a home or paying off my student loans first. Currently, my student loans are the only loans I have and has a balance of $5500 (one for $2000 @ 6.8% and another for $3500 @ 5.6%) but I’m only in my 1st year. Thankfully, my employer is going to contribute generously from here on out though I’m going to have to put some cash down each semester myself. I really want to buy a house in the next few years but I hate the student loan cloud over me. Would you pay off the debt or save for a house down payment first?”

Personally, I think both goals are admirable. If you pay off the debt, your mind is free’er and you can concentrate more on the house down payment (awesome), and if you start saving for the house first you’ll be that much closer to owning (awesome again!). They’re both great for your finances and it’s pretty much a win-win situation. So that’s good!

If I personally had to choose, I’d probably go w/ the saving for a down payment route. Not at all because homes are “good investments” or anything, but just because having a crap ton of cash saved up is wonderful! It’s like having a giant Emergency Fund before you spend it :) Another thing to consider is that you could always use this cash anytime to pay off whatever you like. So if your saving is going well and you want to throw a couple hundred towards the loans, you can do it! Rather than the opposite of paying them down first, and then taking it out and using the money for something else. Once that cash is gone, you ain’t getting it back.

I think it really comes down to your own preferences. If cutting out your debt means you’re a happier person, then by all means go for it :) Especially if you’ve already got a decent Emergency Fund. Paying interest on loans, or anything for that matter, blows, so anything you can do to alleviate yourself from it is a good idea. But let’s see what our readers say – How would YOU GUYS handle this?

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  1. Anonymous February 10, 2010 at 10:04 PM

    Honestly, if you're worried about saving $5,000 for your loans or shoveling that $5,000 to a house downpayment, then you can't afford a house. It's financially irresponsible not to have a 10% or 20% downpayment, and that's a lot more than five grand.

  2. J. Money February 10, 2010 at 11:30 PM

    Unless your house costs $50-$100k ;) but yeah, I get where you're going – def. something to keep in mind.

  3. Someone July 20, 2010 at 1:26 PM

    $5000 in debt is nothing. I WISH that was my problem. I’m 170K in debt at various interest rates including 70K at 8.25% (it’s ridiculous, I know). I’m already saving 20% of my monthly net income for a down payment and paying the minimum payment for the student loans. I have an EXTRA $700-1K every month to contribute to EITHER my down payment savings or an additional payment to my student loans. I don’t know which to do!

  4. J. Money July 20, 2010 at 4:30 PM

    Tough one! Sucks that all the comments here were erased before I ported over to WordPress (I think a lot of them would have helped you out!) but I’d say wiping out that $70k (if it’s your highest) should be priority #1. But only if you’ve changed your ways and know how to live w/out getting back into debt (not all of that is student loans, right?).

    So if it were me, I’d probably throw $500 of it towards that high % rate first, and then the other $200+ into your house account. But that’s just me. In fact, I’d use that house account as an emergency fund and just keep renting for a while ;) Not sure where you live, or why you want to buy a house, but it’s much easier/stress-free to do so after you’ve wiped out a lot of the other issues on hand.

  5. laura collins December 19, 2011 at 5:48 PM

    My husband and I are $80,000 in debt from student loans. Yikes! Due to recent lifestyle changes and my husband found a job, we are now able to save $3,500 to $4,000 per month. Should we pay the loans off or save agressively for a house. Every month I write a rent check, I feel like I am giving money away. Also, with compound interest, we would be able to put 30-40% down after a few years of saving. Which direction should we go?

  6. J. Money December 19, 2011 at 8:27 PM

    Oh man, def. tricky… I’d probably work towards both if it were me (lame answer, but it’s the truth) but I think it really comes down to personal preference and what makes you FEEL better in the end… both routes give you an incredible advantage financially though, so at least you’re winning either way! :) If it’s gonna take you years to pay off your loans, and you think housing prices will go up (and you DEF want a house soon), maybe prioritize that way too? I don’t think there are wrong answers here.


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