Financial experts give their two cents on managing both student debt and a mortgage.
It’s challenging for first-time buyers to break into the housing market as rents keep rising and the inventory of low-value homes remains scarce in most areas. Add thousands of dollars of student debt to the equation and potential buyers may assume they simply cannot afford to buy. Recent data showed that home buyers who completed at least a bachelor’s degree are minimally affected by their student debt when shopping for homes.
Check out some tips from personal finance experts about acquiring mortgages while carrying significant student loan debt.
If you had student loan debt, what was your payment strategy to get rid of it?
I used the debt snowball method to pay off my student loan debt. In 2005, I still owed $13,000. Since my loans were serviced through Sallie Mae, I took advantage of the 1-year forbearance to pause my loan payments so I could aggressively pay off smaller loans that we owed. While the interest still accrues during the forbearance period, I was able to focus on clearing up other debt faster. After the year passed, I was able to start paying off my student loan with more traction. It only took another year and a half to retire the remaining student loan balance. — Toni Husbands of Debt Free Divas
Personally, I was lucky enough to make it through undergraduate and graduate school without accumulating any student debt. My wife, however, accumulated between $10,000 and $20,000 in student debt from going to a small private college for her undergraduate degree. Once we got married, I “married” her student debt as well. Currently, she still has around $11,000 in student loan debt. To manage the payoff, the first thing we did was to call the loan administrator and request a lower interest rate, which they did to our surprise without any problems. Currently, the interest rate is only 3 percent annually, which equates to $124 per month. At this level, I do not feel that much of a hurry to pay it off. Instead, it is more along the lines of a low-interest home mortgage, which we are paying off at the required rate, but no more. — Jacob Irwin of My Personal Finance Journey
If you’re still carrying student loan debt, what is your financial plan to eliminate it?
Slow and steady! — Heather Jarvis of Ask Heather Jarvis
I currently hold quite a bit of student loan debt — over $85,000 — but I like to think that my resolve is tantamount to the balance. When I first graduated, I had nearly double that amount to pay off. But by making the pay-off my first financial priority and sending over $1,700 to pay it down every month, I was able to make a sizeable dent in that number quickly. I also cut out spending elsewhere to have more to send toward my loans whenever possible. This meant limiting meals out, having multiple roommates rather than living alone, and forgoing cabs in favor of public transportation. — Mario Bonifacio of Debt Blog
If you’re a homeowner, did you have student loan debt at the time you bought? How did that impact your purchase?
We didn’t let the student loan debt hold us back from buying a home, but we also purchased a home that easily fit into our budget instead of purchasing a home that stretched our budget. — Katie Brewer of Your Richest Life Planning
We purchased a condo while I had an outstanding student loan balance. The pre-approval process takes into account your debt-to-income ratio when determining the amount you’re able to borrow. Those purchasing a home without outstanding student debt should ensure that their monthly payment does not exceed 25 to 30 percent of your monthly income. We started with a small condo with very affordable monthly payments and assessments that allowed us to have breathing room in our budget to address our outstanding debt — including my student loans. — Toni Husbands of Debt Free Divas
The student loan debt did not impact our purchase much at all, since the home we wanted to buy was very affordable based on our income. For us, I do not believe it would have been better to pay off the student loan prior to buying a house, since our debt was fairly low, carried a reasonable interest rate, and does not tie up a large portion of our monthly income. — Jacob Irwin of My Personal Finance Journey
In hindsight, would it have been better to pay off your student loan debt before or after your home purchase?
One thing I would do differently would be to focus on repaying my students loans aggressively as soon as I graduated from undergrad. Instead of taking on car loans and living in high-priced apartments, I could have been much more aggressive as a single person with no children. Instead, I was comfortable with the idea of paying the minimum amount for the full loan term because that was the normal approach to dealing with debt. — Toni Husbands of Debt Free Divas
If you’re not a homeowner, is your student loan debt prohibiting you from buying?
I don’t believe that my student loan is prohibiting me from purchasing a house, though I may have been able to contribute a down payment fund by this point if it weren’t for my student loans. I still feel like both my personal and professional life are in limbo, and at this stage I feel like renting is the smart choice for my situation. I’m currently contributing extra money toward both my 401(k) and my personal IRA account each year and I could instead allocate some of that money towards a down payment if purchasing a home was one of my priorities. My student loans have definitely put the thought of even saving for a home on the backburner, but it was also not a priority of mine to begin with. — Debt Hater of From Debt to Dreams
What are your tips for folks carrying substantial student loan debt?
The single most effective way to get rid of student loans while saving and building wealth is to live below your means. When you start significantly upgrading your lifestyle, you lose flexibility with your budget. — Katie Brewer of Your Richest Life Planning
Maintain a positive attitude. The best plans and the most sophisticated math in the world don’t mean a thing if you make yourself miserable and give up. Second, make a budget. Knowing where you spend will help you make meaningful cuts and not beat yourself up over meaningless cuts (like single-ply toilet paper or bad Q-tips). Lastly, put together a sensible timeline of how quickly you might be able to pay off all your debt. Having a timeline can change the way you look at your debt; whereas hundreds of thousands of dollars might seem insurmountable, you know that December 2019 will definitely arrive and can therefore plan the months leading up to it. — Mario Bonifacio of Debt Blag
First, use the federal government to your advantage. It offers programs to consolidate and, in some cases, even forgive student loans. Sadly, not everyone knows about them. For instance, a relatively new program is called Pay As You Earn, or PAYE for short. It actually caps the monthly federal student loan payment at 10 percent of your discretionary income. Second, don’t stop paying. The same government that offers helpful programs can also garnish your wages, take a portion of your Social Security benefits, and confiscate tax refunds. Call your loan servicer and ask about your options. But be careful of student loan repayment scams. Only deal with reputable organizations that have excellent reviews and a Better Business Bureau rating. Third, get creative. For instance: volunteer with organizations like AmeriCorp. They offer loan forbearance (which means you don’t have to pay on the principal or interest while working). After your service, you receive a monetary award you can put toward your loan. — Howard Dvorkin of Debt.com
What advice do you have for prospective home buyers limited by their student loan debt?
Build a strong credit history by making your payments on time. Improve your debt-to-income ratio by paying down credit cards and other consumer debt. Balance your competing goals of paying down debt and saving for a down payment. — Heather Jarvis of Ask Heather Jarvis
Don’t let student loan debt hold you back from buying a home. It is important to make sure that you don’t take on more than you can handle, but it’s also important to balance student loan debt with other important financial goals. Make sure you purchase a home that allows you some room in your budget to focus on other goals. — Katie Brewer of Your Richest Life Planning
For anyone looking to buy a home and carrying loan debt, I would say that it is all about balance as with most things in life. You need to set your goals and figure out what is important to you. Are you OK with stretching your student loans out a few more years in order to save for that down payment? Or does the student loan payment need to be eliminated so that you have breathing room in your budget for a mortgage? It may be best to pay off your student loans as quickly as possible (especially if they are high-interest loans), and then switch your focus toward purchasing a home. If you do have any outstanding credit card debt, I would advise you to pay that off before even starting to save for a down payment. If you have sufficient income to pay off your student loans a little slower and buying a home is a priority for you, start shifting some of that money toward your down payment instead. If you come up with a sound financial plan and make sure that you can afford the monthly payments, I don’t feel that there’s any reason that a student loan will prevent you from owning a home. — Debt Hater of From Debt to Dreams
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