pay off student loans or save for down payment on a condo?

How old are you?

fresh out of school. 22 years old. started working 6 months ago.

pay off the student loans. why carry them? earning 5.5% on investments in today's low rate environment, year in and year out is not a slam dunk. when the student loans are paid off, it will be easy to save for your other goals

Paying down the student debt is a good idea, but first make sure you can put aside some safety net money, maybe 6 months of expenses. This isn't an investment, this is your emergency fund.

"I've always wanted to own in NYC"

So you've "always wanted to own in NYC" for a whole ... what ... 5 years?

Pay off the loan. You will have that much more trouble getting a mortgage with that loan hanging over you for 20 years and your job will not be much use since you have been their over 6 months.

I also don't feel comfortable with anything less than 6 months expenses so save for that first before anything else and don't use it for anything else. (It will take time to find a new job.)

Once you have your safety net, another option is to pay off your loans at a set amount each month while simultaneously building up another stash for investing/down payment. That way if a storm comes, you have the cash to weather it. But meanwhile, you're still reducing your debt load and saving up/investing cash for a purchase. If you feel that you can't invest better than 5.5%, then maybe paying that debt off makes sense.

Note: that school debt may impact how much you can borrow for your first home (though 35k is negligible), but i personally wouldn't go rush out and pay it all off at once... prefer the monthly pay down approach myself.

ok so here is some more information on my thought process. i misspoke in my original post. I would have to pay off the loans in 10 years (not 20-30). So I crunched the numbers and here is what it comes down to: I can either pay off all my loans as soon as possible (probably the next 1.5 years) which would come out to a total payment of ~$32k OR i could pay it off in 10 years with a total payment of ~$42k. So, in the end I would save about $10k by paying now.

While in the end, I would be saving money by paying now, I am considering making monthly payments for 10yrs instead because I would like to try and take advantage of the real estate market as soon as possible while prices are still low i.e., I would like to use that $30k towards a down payment as soon as possible as oppose to paying off loans. Thoughts, comments, criticisms?

As to NYCMatt, not 5 years...more like 9. Reason is, I've lived in the Bronx my whole life (other than 4 years in Michigan at school) but spent most of my time in the city starting in HS. Since then, I've always wanted a place closer to the city.

student loan debt is like IRS debt--you cannot get rid of it, even in hardship, so you should pay it down as you are able. If it were a very low cost, it would make sense to pay as little as possible. But my feeling is as long as its costing better than 5%, it's a no brainer to pay it off. Don't neglect emergency reserves, but why not calculate a monthly payment that will amortize the debt over two years?

1. Definitely prioritize emergency-fund savings of 6-12 months cash
2. I believe student loan interest is tax-deductible. If so, re-do your calculations.

Not many people know this but student loans are basically a free life insurance policy. If you die before paying them off, our wonderful government pays them off. This would be more meaningful for you if you had higher loan $ and a spouse or other dependent.

Personally, I wouldn't pay them off until you have so much cash building up that you can't figure out where to invest it. If the choice today was "buy a condo" or "pay off loans", I'd definitely choose the loans (but that's just me).

>> I would like to try and take advantage of the real estate market as soon as possible while prices are still low

That's dangerous thinking (gambling). Do it when the time is right.
I still say, play it both ways. In other words, save cash for the condo AND pay off the debt and see where you are and how the market's changed every year.

Who knows you may decide you want to go to California next year.

paying off a 5.5% interest loan is like getting a guaranteed 5.5% rate of return on your investment which is a pretty good rate in today's low interest environment. i agree with the rest of the posters that you should first build up some cash reserve (6-8 months of your expenses - including current rent) and then pay back this debt. then start building up money for a downpayment.

with renting being much more economically advantageous right now than owning, prices likely to fall some more (or at least remain steady), and your credit not being so good by having unsecured debt, i am not so sure that your so-called down payment can get you very far ($30k as a 10% downpayment on a mortgage does not get you a condo below 96th street)...

It is true that tax deductibility means income earners pay less interest. However, if you lose your income out five years, you pay more interest exactly when you cannot afford it, and the hardship doesn't get you out of the debt trap. It doesn't hurt to analyze how the debt works in all scenarios. This is the kind of debt you don't really want to hold onto IMO, unless it is super low cost.

Not to sound obnoxious, but if you are having trouble saving $32K over an 18-month period, are you really in any kind of a position to buy Manhattan real estate? Not only do you need a down payment, you need to make some bank too. Look... you're young and you've got a lot of life ahead of you. The right time will come. And rest assured, prices are only going down from here and will stay down for a long, long time...

thanks for the tips all. also, saving $32k in the next year and a half is on the very conservative side nor do i plan on having only $32k for a down payment. I would definitely save more than that for a longer period and hopefully be making "some bank" before purchasing.

noob, you've received some good advice above. Let me add my thoughts for what they are worth. I graduated law school with a fair amount of debt from a private law school (my debt, and salary, were roughly half of the debt and salary of many starting associates these days. Funny how those numbers are so corolate.). I had to pay about $1,000/month. At first I paid the minimum but within a few years as my salary increased I started paying up to about $3,000/month, which was most of what I had left over at the end of the month. Maybe I saved $1,000/month (I am not the best saver in the world). Then I was 30 years old and saw that many of my friends, even those that didn't make as much as me, had bought houses/apt. I realized I could have bought an apt if I had actually paid down my student loans less and saved more. I started paying the minimum again, fairly quickly saved up enough for a down payment and have never regretted the decision.

Some things about student loan debt that have not been mentioned above, by I'm sure you know. First, I think that you can easily get hardship deferrals if you lose your job or a deferral if you go back to school. Second, a student loan can usually be refinanced and the term extended if need be. As for the tax deductibility of it, I would take a look into that. I think that deduction gets phased out pretty quickly, so you should check to see if/how much that applies to you. Also, at some point the AMT kicks in and you lose a lot of deductions anyway (charitable deductions and mortgage interest deductions seem to be the only things that I have that are not affected by the AMT).

If I were you, I would consider saving the $35K for the next 1.5 years, while making the minimum payments on your loans. If you don't think that it's a good time to buy at that time, well then you can start paying more than the minimum on your loans. If you do think it's a good time to buy, and you otherwise have sufficient reserves, then you have the ability to do so.

Regardless, good luck with your decision.

noob--i have to disagree with almost everyone on this board except jojo. DO NOT pay down your student loan. Things to consider would be whether or not the loan is private or gov't--at 32k, I would imagine its a Sallie Mae loan and whether the interest is fixed or floating. If it's a gov't loan, you can get an extension for, I think, 25 years--ie, 25 years in TOTAL for the repayment period. Additionally, the gov't will, as jojo mentioned, provide lower payment options if you face hardship.

What you should consider is whether or not you can make your money earn more than your current debt rate, ie, 5.5%. As someone else also mentioned, you can write off student loan interest payments on your taxes, offering a tax shield of up to $2500. Also, as the years go on, if you're paying a fixed payment, inflation will help eat away at the amount you owe.

Do save some money for a rainy day, DO invest some money, and pay down the student loan over time. 32k shouldn't be crushing and as the years go on, it'll be less than a monthly cell phone bill.

Noob, just focus on saving. If you do that, you're going to wake up one day and realize you have a huge pile of cash and you don't know what to do with it. Then revisit this discussion.

true. money begets money. Having free cash can often help save you lots, whether better interest on a loan, or not having to take out the loan in the first place.

student loan interest deduction goes away at around 90k of AGI

unless the rate is variable, i would save first. also is it direct loan with govt or salliemae/private?

assuming it is fixed and govt, you can get hardship postponement if needed.

do you plan to get a mortgage to buy your house? if you do, it will likely be at least same interest rate if not higher. difference is if you lose your job then you are screwed. no reason to pay bank at cheaper rate and then borrow at higher.

if it is variable, then stick it in save in something conservative for now and build a nest egg. if rates rise and they prob will eventually but no one can guess whether in 1,2, or even 5 yrs, then you can pay whole thing back at that time.

also this is highly personal. you are young and asking about good investing questions already so you may be prone to save. many 22 year-olds will burn through the cash every month instead, so if that is the case then pay it off.

finally don't be too freaked out by it...although 32k is a lot of debt, you are young.

i graduated med school and residency with 310k of debt 2 years ago (one of highest among my peers but many broke 250k). thkfully about 50% all of it is fixed at 2.7%. the other 50% i paid off b/c it was private and despite what they say, a private education loan is like a credit card. if the lender wants to change the agreements the only thing that can stop them is political backlash but if house of cards crumble again, political backlash won't stop them from asking for cash back at unreasonable rates.

5.5% is much higher than your rental yield on a purchase.

noob, how many months from now are you planning to buy the condo and what is the price range of the place you have in mind?

Think about how much down payment and income history you'll need at that point. Regarding income history, it's especially important since a significant part of your income is likely in the form of a bonus.

wow, im getting very conflicting view points here.

cj and jojo, your thoughts are pretty much my train of thought for not paying off my student loans. i am doing what you said now, "saving the $35K for the next 1.5 years, while making the minimum payments on your loans", but decided to post here to see if i should be doing the alternative and paying it off asap. also, my sister was in your exact situation jojo. she had much more debt than me and decided to pay it off as soon as possible and told me that she regretted it and shouldve bought real estate instead.

anonymousbk, thanks for the reassurance. i'm not worried at all about my loans. my siblings took on much more student debt than me so i know the deal. and yes i am very prone to saving. my loans are government loans at a fixed rate and i do have the option of deferring them/extending the payment period in times of hardship.

Sunday, not sure when i want to buy. this is all contingent on how quickly i can become financially stable (i.e. enough for a dp while having a "safety net" of reserves). i was thinking that i can get a decent 1 bedroom in manhattan or bk for ~$325k. we'll see how the market is when i decide to buy. and what kind of income history will i need for a $325k condo?

thank you all again for the tips!

Two thoughts noon. Whether or not that 5.5% is deductible makes a big difference. Basically, the credit risk of the loan is somewhat low: you cannot shake it off through bankruptcy, etc. If it's tax-deductible, the effective interest rate you are paying is on par with a 3.7% 10-year Treasury, so it is fairly priced for the risk. If it's not deductible, on the other hand, the 1.8% credit risk premium starts looking rich. The "cheapness" of the money is highly dependent on the tax story, so figure that out first, and don't forget to correct for the riskiness of investments.

More importantly, the RE ship has sailed. For better or for worse, you missed the boat. You're young, so you can afford to do some leveraged speculation, but I think you're looking at things with a rear-view mirror. Like it or not, investment opportunities do not always show up in an asset you'd like them to show up in. Do your homework. If you think buying Manhattan RE now at 25x gross rent is catching the bottom of some greatest-opportunity-in-a-lifetime situation, I don't think you've done your homework.

decent 1-bedroom for 325k? think again

since you are essentially fresh out of college, i think you'd be pretty crazy to try and buy any time in the next year--i understand that you think the RE environment is right, but i really dont think its the right time for you (as someone else mentioned)--get yourself acclimated with real world living (working, saving, going out, etc.), and see how much your saving rate really is--if you really think you'll be saving $32k in the next year, or even year in and a half, i think you definitely need this acclimation--factor in rent/utilities/gym membership/going out/nyc prices in general, and i think you'll be saving a whole lot less than you think

just my two cents

This is the myth. The smartest thing to do 15 years ago out of college was to buy at 10x rent. Now at 20x+ rent its not even close to sensible.

noob, i'd pay the student loan, as you cannot get rid of it in bankruptcy if TSHF...

"difference is if you lose your job then you are screwed. "

that's really true in your case. buying a house instead of paying your student loan ASAP is a double bet on nothing bad or unexpected (job loss, disease, divorce...). so, if you have a great strong safety net (parents with a lovely and big house that would love for you to move in, or a rich spouse... or a safe job with good prospects...) i would say...

get rid of that student loan!! (i'm taking like dave ramsey here).

Rhino, that's cause people with student loans used to be able to clear them up with Ch11 if things went wrong.

now it's a 180 degree change as they are not any more. all those that had troubles 20 years ago, would have been in deep sh*et under today's rules. the downside risk is huge.

There are some smart posters here who clearly know more about finance than I do. I completely agree that noob is unlikely to get an after tax annual return of 5.5% over the next 18 months if he saves up the $35K, especially given that the money for the down payment should probably be invested very conservatively. What I would argue, however, is that the difference isn't that great in the grand scheme of things (noob is 22 and so he will only be 23 or 24 when he could have the $35) and what noob is giving up by paying down the debt ASAP is the ability to buy a place in 18 months if, in 18 months he thinks that is the right thing to do. I don't think that anyone can accurately predict where the sales market will be in NYC in 18 months (or maybe someone can and those people deserve to make a lot of $ based on such knowledge) but if noob pays down the student loans, s/he will not have the ability to buy. Student loans are a fact of life. Tons of people have them, especially people in professions that require grad school. I've received many mortgages over the years despite having student loan debt. I could be wrong, but I can't imagine that $35K of student loans is much of a hindrance to getting a loan for someone who otherwise has a good job and good credit. If that was the case, not many doctors or lawyers would be able to buy during the first several years of their careers.

"decent 1-bedroom for 325k? think again"

This looks pretty decent:

http://streeteasy.com/nyc/sale/332989-condo-835-riverside-drive-washington-heights-new-york

Pay off the loans...you will have enough debt if and when you do get a mortgage.

Has anyone gotten a mortgage recently??? Very difficult to get them now, banks are NOT LENDING!!

Indeed.

That said, the kid needs to live in the grown-up world for at least 5 years or so to see how much he'll REALLY be saving.

I'm sure he thinks he's figured it all out on his Excel spread sheet, but what newbies always forget are myriad little "gotchas" that can add up to hundreds and even thousands of dollars per year:

-- $10 worth of quarters at the laundromat every week ($520 per annum)
-- $25 at the dry cleaner's every other week ($650 per annum)
-- $16/month for four porn sites you rationalize as an "entertainment" expense ($768 per annum)
-- $350 per annum for membership to professional organizations
-- $0.50 every day for the Daily News ($182.50 per annum)
-- $4.00 every work day at Starbucks ($1040 per annum)
-- $4.00 per drink at the nightclubs ... 3 drinks every Friday, 5 every Saturday ($1664 per annum, BEFORE tips)
-- $15 per cab ride you hadn't planned on taking, but justify because it's so late ... averaging once per week ($780 per annum)

That's already nearly $6,000 you likely hadn't planned on spending. And we haven't even touched on "extras" you'll be spending at the grocery store, or those little occasional premiums you'll splurge on like that pair of Prada shoes or that Jack Spade messenger bag.

I don't know what nighclub in Kansas you're going to for $4 a drink, but here in civilization, thats the tip on the drink.

;-)

> -- $15 per cab ride you hadn't

Oh wait, coming to me now... outer borough guy, right?

Why you averse to naming Brooklyn in your screen name...

also, anyone that actually uses the term "nightclub"... is probably old enough to remember $1 drinks.

;-)

"> -- $15 per cab ride you hadn't

Oh wait, coming to me now... outer borough guy, right?"

***

When is the last time YOU were in a cab?

It costs $20 to go from Wall Street to Midtown. BEFORE the tip.

"decent 1-bedroom for 325k? think again"

This looks pretty decent:

http://streeteasy.com/nyc/sale/332989-condo-835-riverside-drive-washington-heights-new-york

i believe he said manhattan NYCMatt...not only is that location not in Manhattan, it is horrendous to boot

what is a "nightclub"?.....where can you get 4$ drinks ????..

and you talk about three drinks,...well, try three per hour, for several hours....

porn subscriptions....matt...did you really need to tell us that?

and who reads the friggin Daily News?....how about the ny times, or wsj....

Could it be a worse time to move to Harlem for the privilege of owning? Don't let that $35k burn a hole in your pocket. Pretend its not there for the next two years. Paying your debt may be its best use today, but you may find in 12 or 18 months, you would wish you had the optionality back.

"Paying your debt may be its best use today, but you may find in 12 or 18 months, you would wish you had the optionality back."

Like when you lose your job for a year, and need it for living expenses.

Jim, I used those examples only to be highly conservative.

> When is the last time YOU were in a cab?

This morning.

And most of my cab rides are under $10 (I usually don't need to go to the tip of Manhattan, I aim for the center).

But its not the amount I'm talking about, its the need to do it once a week.... sounds very outer borough to me.

Well yes, like if he loses his job... But better yet, if the worst case plays out and Manhattan starts trading at $500/ft....And I am not talking about Harlem.

"But its not the amount I'm talking about, its the need to do it once a week.... sounds very outer borough to me."

Or, very "I just don't have time to deal with waiting for subways late at night".

I'm in cabs all the time, and I rarely leave the island.

Won't you need your parents to co-sign? I can't imagine any coop board approving your purchase when you're fresh out of college in this environment. Condo is more likely, I guess, but they're more expensive..

youngfamily:

" pay off student loans or save for down payment on a CONDO ? "

youngfamily, not sure if i will need parents to cosign. that's what im trying to figure out by posting here so if anyone knows please enlighten me.

NYCMatt, you still pay for porn?! ha! and nor do i wear prada or jack spade bags or drink starbucks. my taste aren't as high end, well not yet at least. i'm a pretty frugal person.

as for my ability to save $35k in in the next 1.5 years seems MORE than doable on my part. it's a very conservative number.

also, i wouldn't mind living in bk either or harlem.

thanks again for the tips.

"NYCMatt, you still pay for porn?!"

No. YOU do. That was the point of my post.

notadmin; my point is that it'll be hard to pass the coop board if noob wants to buy on his/her own.

Young, he's looking to buy a CONDO.

There is no board to pass.

noob - Just stay in grad school forever and keep deferring those loans. That's been my plan for the past 6 years...although it was inadvertent.

on a serious note though, we had difficulty securing our mortgage, and we mentioned to the bank numerous times that we could get a cosigner, but they did not seem interested. They tried as hard as possible to make it so that we did not need a cosigner. I can only surmise this was because of the extra work required in vetting the cosigner's financials.

We recently bought in Harlem up near Striver's Row. I know many ppl here say that Harlem prices are unsustainable and/or will not return to peak for a long time. That may be true, but my opinion is that Harlem is not going to fall back to where it was before the bubble started. The neighborhoods up here have changed significantly for the better, and I just cannot see all of that reverting back to where it was in the next decade...Unless unemployment increases continuously for a few more years.

"Unless unemployment increases continuously for a few more years."

Bite your tongue!

mmarquez, thanks for the tips. im guessing that you are happy with the neighborhood? also, as a point of reference, where did you live before harlem?

nycmatt, thanks for clarifying with everyone that you do NOT pay for porn.