Pay off student loans or save for bigger downpayment??

pay off the student loans. your situation may change (ie get married, make more money, prices drop by half, etc.) You will be a better candidate - debt free....keep up the good fiscal responsibility. Glad you are saving for your 401K --

Learn how you can earn more than 4% (after taxes). It isn't hard - there are dirt-simple investment strategies that have averaged quite a bit more than that over the last 70+ years. Nothing is without risk, but for only 4%, you can do it with the tiniest amount of risk.

Then it won't matter what you do with your current student loan debt. The investing knowledge you gained will help you much more over your lifetime than this 1 decision could benefit (or cost) you.

Do you have other credit to add to your history? If not, keep the loan but pay a bit extra. It sounds as though if you pay it off you won't have much cash, and you can't touch the 401K amounts without penalty except when you buy (at least the way the law stands now, there are rumors that will change), and 4% isn't bad especially as savings interest rates are likely to go up later this year. Cash is a lovely commodity these days, and some cushion is a great thing.

Debt free isn't the best candidate, necessarily. And a debt history is imperative for a decent credit rating.

Thanks for the insight to everyone who has responded so far. I do have 2 credit cards that I use (and pay off in full) monthly. So even if I eliminate the student loan debt, I will have credit history. One of the other wrinkles that I should have added is that, because of my job, I cannot invest in the stock market outside of my 401(k) contributions. Bank CDs and T-bills are fine, but stocks are a no-no.

"because of my job, I cannot invest in the stock market outside of my 401(k) contributions"

Ahh, in which case my prior semi-snarky comment doesn't apply to you. Nevermind it. However... your job doesn't let you invest in the stock market at all? Not even in broad index funds?

We can't do direct stock investing either. But you can do mutual funds, no? Not that they would have been a stellar choice last year.

I still don't think that getting rid of the low amount of net interest you'll be paying to maintain credit that doesn't reflect badly on your rating is worth risking losing access to that money in the long term. In a year or two, maybe, after you've bought and you've been working for a while longer. You can't take out another student loan after you pay it off, and if you need money it will likely cost you much more than 4%.

tech_guy: no offense taken for your semi-snarky comment. And, in general, you're right that it wouldn't hurt me to learn a little bit more about investing anyway. If only because it's good stuff to know.

Yeah, sadly, I can't invest outside of my 401(k) contributions, even in broad index funds. Conflict of interest concerns.

Frankly, at this point, I'm leaning toward (1) paying off the whole thing or (2) making extra payments each month so instead of having 9 years left on the loan, I cut that down to 5 or less. But I have a sneaking suspicion that I'm not thinking of some relevant factor that affects the analysis.

why don't you reduce your 401k contribution going forward, either to pay down your student loan or add more to a down payment in the short run?

CORRECTION: I just looked up our policy re: purchasing securities. There is an exception for open-ended publicly traded mutual funds. Looks like it's the same idea as the policy aboutready was referring to.

condojake, I would assume that the tax benefit received for the 401K investment is well more than the 4% interest paid on the student loan.

RG- I am in a very similar situation. I have been paying down my student loans, but have held off on taking a big whack at them. I am leaning towards doing so, however. Theoretically, less debt would make you a better candidate for a mortgage, assuming you find something you want to buy.

Here's a rough primer on historical returns (85 years):

https://personal.vanguard.com/us/planningeducation/general/PEdGPCreateTheRightMixContent.jsp

Sure, the safest option (20 stocks, 80 bonds) still had negative years 11 out of the ~85, but averaged 6.8%. I personally do 50/50, which is 8.4% returns (half taxed at 15% federally, if held over a year). So basically you have to weigh the risk of losing some of your down payment money (the 11 years out of 85 aren't wipe-out years, especially with 80% bonds - those were probably pretty mellow negatives) with the potential upside of earning the higher gains.

Also, full disclosure, but the 50/50 ratio is just my investment account. It doesn't include my 401k or other issues related to my personal financial situation. If not for other issues, I'd probably be higher into stocks (being a recent grad myself).

Also keep job security in mind. If you feel very secure in your job, a further stock market downturn could be good for you. Sure, you have to put off home ownership, but you get to buy stocks at historically low prices with your secure salary. Being a recent grad means you have time (and additional salary) to ride out the trouble.

If you don't feel secure in your job, you have to worry that both your investment and your job tanks at the same time.

Hope this helps.

Here is a serious question for you, rg... why buy at all?
Not saying its right or wrong, just curious about the logic.

Say prices do come down to those levels. Why do you think it is still the best use of your $$$?
Especially if you are young, the flexibility of renting could be worth something.

Where does the assumption that you need to buy come from?

What if it was still cheaper to rent than buy in a year?

recent_grad, payoff your student loan and any other bills you have incurred. I assume you are no more then 24 years old? I don't know where you are from or where you are looking to live exactly. If you are new to NYC try renting to see if you like NYC for the long run. In 12-24 months prices will be significantly lower in all of NYC, what you were looking to pay 400-$500k for might be half of that in 12-24 months. Continue to save and best wishes too you.

Hold on there, bucko!

Not sure what type of student loans you have (Stafford/govt loans, or private loans), but what's your job security like?

The main, unbeatable advantage of student loans, especially govt ones, is that if you're unemployed, you can put them on deferment and stop paying them, with zero impact on your credit record. (I've been there, and when you're in deferment, the loans simply show up on your credit report, month after month, as current. This is because your "current amount due" is $0 for the length of the deferment.)

No other type of debt (at least, not that I'm aware of) gives you that sort of flexibility. For Stafford loans, I think you're allowed up to 6 instances of unemployment deferment of 6 months each over the life of the loan.

If you have any doubts about your job security, you might want to hold on to both the cash and the loans for a while.

Personally, I would keep paying the student loan on the normal schedule, and put your cash in a diverse mix of investments. Even if those investments do not provide a 4% return, I would rather have those funds available at my disposal if I suddenly want them for a down payment or for any other reason. In other words, I would not rush to pay-off any debt that has a relatively low interest rate. The savings (if any) will not be signficant, meanwhile you no longer have the funds on hand.

recent_grad, I generally agree with nyc10022 that buying with a short term time horizon is generally a bad/risky idea, but there are many other threads on this, and you can make your own decision.

I think the question on student loans is fairly simple. When you think about buying, is the downpayment a bigger constraint? Or is the qualifying and comfortably affording an appropriate mortgage the bigger constraint? In my family's case, we earn very good money, and are confident we can qualify for whatever mortgage we will need (within reason). But we haven't been making good money for very long, so our savings is not as much as we'd like. And because we want a large, relatively expensive apartment, requiring a jumbo, we want to put 25-30% down. So, for us, the downpayment is the bigger constraint. So we are choosing not to pay off the remaining grad-school loans, so as not to reduce the potential downpayment earlier.

You should do a similar analysis, and factor that into your decision, at least with respect to the impact of your decision on your ability to buy an apartment.

carry the loans and keep saving/earning

Thanks all for your comments/insight.

mutombonyc: I'm not 24, but still shy of 30.

One thought that I had recently: one major (to me) advantage of saving up for a 20% downpayment is that it eliminates the need for PMI. Paying off my student loans early will prevent me from having enough for a 20% downpayment in 12-24 months. And I believe that the cost of PMI for a $400-$500k apartment should be roughly equal to the interest I'm currently paying on my loans. Therefore, the "cost" of the loan may be the same whether I pay it off early or not, but by not paying it off early, I have more flexibility in case I get laid off, circumstances change, etc.

Still--my "gut" response whenever I have any kind of debt is to get rid of it asap. But that may not be the best approach.