Pay Off Student Loans or Buy House in 2023? Your Questions Answered

Should you pay off your student loans or buy a house in 2023?

This is a typical question without a typical answer.

Traditionally, the question has been whether you should pay off your student loans (often at around 6% interest) or buy a house (often at 3% interest).

It was still complicated, but it was fairly direct.

Unfortunately, the situation becomes even more complicated with a lot of “student loan” furor in the air.

Look at the smartest financial decision: reducing student loan payments or taking on a monthly mortgage payment.

Before you get started…

Everyone’s financial situation is different. Before you consider whether you should buy a house or pay off your loans, you should know:

  • the exact amount of your monthly debt payments,
  • your outstanding student loan balance,
  • how much you would likely pay for a house,
  • And any other monthly payments you need to include in your budget.

Having $1,000 in student loan payments a month vastly differs from having $75 in monthly student loan payments. Similarly, comparing $200,000 in student loan debt with a $100,000 home purchase is different from comparing $20,000 in student loan debt with the down payment for a $2,000,000 home.

Everyone means something different when discussing their student loan debt and house costs. If you’re still concerned, talk to a financial advisor and a real estate agent.

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Paying off your student loans vs. buying a house

Financially, paying off student loan debt faster is generally considered “better.” Why would you take on a loan (even a 3% loan) when you could pay off a loan (especially a 6%)? But buying a house is more complicated than that. You’re replacing a static fee (rent) with an equity-building investment (mortgage).

Let’s say you’re spending $1,200 in rent right now, and you can buy a house at an $800 mortgage. That may sound hopelessly optimistic, but that happened about five years ago. It would make sense to buy a house even if you could pay off your student debt. You would save a considerable amount of money every month.

But here’s the catch: student loans impact buying a house.

When you buy a house, your student debt is included in your debt-to-income ratio. In other words, the more you owe in student debt, the less house you can buy. If you have a $300-a-month student loan payment, that could decrease the amount you can spend monthly on housing by $300.

So, if you want a house you can’t afford, you could have no choice but to pay off your student debt. Your student debt could be holding you back from a mortgage.

Is buying a house a smart financial decision?

A home purchase is almost always financially sound. In most cases, you will build enough equity to cover the interest, or you would spend more in rent regardless. That’s almost always the case if you hold the house long enough. Generally about five years)

Buy it’s not just about finances. It’s also about emotion. If you’re trying to increase the size of your family, for instance, you need a bigger home. You must own your home if you don’t want to move every time your landlord increases rent.

So, even if it might be “smarter” financially to pay off your student loans first, there can be situations in which buying a house materially makes far more sense.

Of course, you could also be the person who psychologically benefits from being debt-free. That’s a different calculation entirely. If you are close to paying off your student debt and paying it off would make you feel better about your situation, it’s different. Then you can pay them off and resume saving for a house.

Do you need to pay off your student loans to buy a house?

Not always, unless you owe quite a lot.

First, student loans are a better type of debt than most other types of debt. Student loan debt is less expensive and more “responsible” than credit card debt or high-interest auto loans.

Say you have $300 in student loans and a $300 credit card bill every month. Paying off your credit makes more sense. And if your student loans are low enough (or your income high enough), the impact on your mortgage is likely negligible.

The question is whether you can afford it. If you have $600 a month in student loans, it could be that you can’t afford the house that you want every month. And in that case, you must pay off your student loans first.

The magic of a pre-approval

A lot of your questions can be answered by pre-approval. Go through the pre-approval process with a bank. They’ll tell you whether you must pay off your student loans before considering buying a house. It’s possible that they might not factor in. Always try to get a pre-qualification or pre-approval before you make any decisions.

Now, there’s another question: Your credit score. If your credit score is bad because your student loans haven’t been paid off, you need to do something about it. But usually, just paying your student loans on time is enough.

The elephant in the room: What about student loan forgiveness?

Note that there are multiple types of forgiveness. For instance, if you pay on an income-driven plan for 20 years, your loan is forgiven, regardless of the amount of debt. If you work in public service, you can get your loan forgiven in eight to ten years. So, there are forgiveness avenues built into the student loan system.

But we should also note that as of December 2022, there’s also a question of whether $10,000 to $20,000 of a student’s loan debt could be forgiven entirely. If you have public loans, it’s possible.

And that means that for some, nothing can be gained by paying off student loans. If you have private loans, those won’t be forgiven. If you have loans from the government, though, you may want to wait until mid-2023 to pay them off, when forgiveness has been decided upon.

Also, if you paid your public student debt during the pandemic, you could qualify to get those payments back. That could be enough for a down payment.

How long will your student loans take to pay off?

Most people have set loan terms. If you have ten years left on your loan, can you wait ten years to purchase a house? If you’re on an income-based repayment plan and it will take closer to 20 years (possibly if you accrued far more debt than you can make in income), do you want to wait that long while renting?

The longer your student loans will take to pay off, the less beneficial it is to pay off your student loans before buying a house. That’s because the longer you wait, the more equity a home would build.

Today, houses can increase by 10% a year. So, even at a 6% interest rate, you’re making yearly money by owning the house. It’s an investment in your future. Meanwhile, student loans are never going to accrue value. All the value you would retain from them (higher income potential) has already been gleaned.

If home prices are accelerating enough, you could find that you never save enough for a down payment.

How much could a larger down payment on a house matter?

Alternatively, you may want to consider that you could benefit more from putting a larger down payment on a house rather than paying off your student loans, even if you could potentially do both.

A larger down payment can matter a lot. If you have enough money to make a 20% down payment on your house, it may be enough to subvert any student loans you have. Your current debt-to-income ratio doesn’t decrease, but the amount you need to borrow goes down.

Further, if you make less than a 20% down payment, you could need to pay PMI (private mortgage insurance). That could make a significant dent in your household budget. Depending on the cost of the house, PMI could be more than your student loan.

Do you have an emergency fund? What about retirement?

Don’t forget that you also need to look at your whole picture; student loans and house-buying aren’t everything. There are other monthly payments (like credit cards) and other savings types.

If you have any debt, it’s essential to make sure you have an emergency fund that can cover at least three months’ worth of expenses. That way, if you ever find yourself in a financial bind, you have some cushioning to fall back on.

Further, you should be allocating money to your retirement account. A pre-tax retirement account makes you money; it makes you however much you’d pay in taxes. So, generally, you need to save in an emergency fund, invest in your pre-tax retirement account, and then start paying off low-interest debt like student loans. If you don’t have an emergency fund, you should work on that before buying a house.

How swiftly are home prices in your area increasing?

Some areas are increasing by about 10% year-over-year. Other areas, particularly in the midwest, are increasing by closer to 20%. If you have an area you want to purchase in and you’re concerned that you could get priced out of the market, it’s far better to buy a house than pay off your student loans.

Of course, you must look at your current financial situation and ensure you can afford a mortgage. But if home prices are increasing faster than inflation, it’s worth considering that buying now could provide more value for you down the line. On the other hand, if your current interest rate is abysmal, something could be said about waiting.

No one can tell how the market will pan out long-term. But getting priced out of the market only means that your rent is likely to increase, too, even if the rental costs lag slightly behind the purchase costs. Altogether, that means that if you’re in an expensive market, you’ll likely have problems later if you don’t purchase now.

What are your current goals?

Finally, do consider that there are other aspects at play. If you think you’ll move within three years, you should probably pay off your student loans before buying a house. Otherwise, you’ll have to sell your house in three years.

Conversely, if you’re finding it time to settle down and know the perfect neighborhood, you should consider buying a house instead.

Buying a house is almost always a solid financial decision, and most people are expected to carry their student loans through their entire term. And if your monthly payment is too high on your student loans, it’s also possible to refinance student loans rather than eliminate the debt payments.

Conclusion

Buying a house will always be a personal and financial decision.

For the most part, having less debt is always better. It’s traditionally been the case that you should pay off all your debt and then buy a house.

But that isn’t reasonable for most people today.

The answer depends on your financial and emotional circumstances, as well as any potential forgiveness programs that are available to you.

Take the first step by getting pre-approved and discovering how much of a problem your student loans could be.

FAQs

Should I pay off student loans or the house first?

If you’ve already bought a house and you’re wondering whether you should pay your student loans or house first, it’s generally whichever has the highest interest rate. But you should be conservative when paying student loans off now if you could qualify to get your student loans forgiven later.

Is it worth paying off your student loans?

Generally, it is if you can. You will save your interest rate, which could be as much as 6%. But if there are other investments you could make that would pay off more (such as a house), you may be better served doing that.

What age should student loans be paid off?

The standard student loan is ten years, so most people should have finished paying off their student loans around their mid-30s. But life happens, especially if someone continues on a higher degree path, such as a Master’s or Ph.D.

What is the most efficient way to pay off student loans?

The most efficient way to pay off student loans is to pay them off as calculated over time. You can add additional payments to your student loans, but most other debts (even mortgages) may have higher interest rates, which makes paying off your student loans last more appealing.

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