AboutGina Boykin Expertise Financial planning, debt management & credit cards, and money-saving tips for adults and teens. Saving vehicles such as CDs, treasuries, bonds, and money-market funds. I provide honest, objective and relevant information to help you made the best decision for your money.
Experience Over 10 years of combined experience in accounting, audit, investing, entrepreneurship, real estate.
I am the CEO of Atlanta Y.E.S., a nonprofit organization dedicated to financial literacy for youth.
Education/Credentials B.S. Accounting, 10 years of experience in accounting, audit, and investing
Question I have $60,000 in student loans. About $12,000 of that is low-interest, fixed-rate federal student loans. About $50,000 is private loans with adjustable rates which are at 7.25% even now, and have been as high as 14% in the past. I have minimal credit card debt (less than $1,000).
Refinancing private student loans isn't a great option:
1. Not much lending right now
2. All the private consolidation loans still have adjustable rates
I have been able to carve out roughly $1500/month for savings and/or debt paydown. (two incomes, and my husband and I are "dorm parents" in exchange for free rent).
Should I behave like a person with $50,000 in bad debt and funnel all extra money toward paying that off ASAP? That leaves me with no down payment for a house in three years or so. (I'm 25, my husband is 28). But it also frees up my choices (like staying at home with the kids I want to have in a few years). I don't believe it's a mistake to put off buying a house until you can truly afford it. Maybe in our situation we can't afford it until after these bad loans are gone.
What do you think? Thank you for your time.
Answer I don't think it's necessary to be out of student loan debt before purchasing a home. It is very important to have a down payment, especially due to the changes in lending standards. So let's start there. If you have an idea of a price range of the home you will want, you can easily back into what you need to save each month. For example, if you want a home around $200K and plan to put down 10 percent, you will need $20K + something for closing costs and moving expenss (for this example, we'll say $8K in other expenses). Now divide that total amount ($28k) by the number of months you have until you move and that is the amount that should be set aside for the home. If you wanted to move in 2 years, that would be roughly $1,100 a month. If in 3 years, it drops to under $800, and would still allow you $700 to pay down debt.
You may need to factor in a down payment closer to 20 percent, considering tightening lending requirements.
When you start thinking of the price range of the home, it would be best to select a price where the monthly housing cost (payment, taxes, and insurance) can be paid easily from one salary. If you do this, you will be protected in the event of a job loss, and will have the freedom to stay home if you so chose after having children. That will be the biggest factor that will help or hinder your options later, as opposed to your student loan payments.
If the monthly amount you need for your home is less than $1,500 (and hopefully it is, or you may need to reconsider your time frame or home cost), you will still have the ability to pay down debt at the same time. The credit card should be the first to go. Then you can work on paying off those higher rate student loans (as these rates will go back up), starting from the smallest balance to the largest balance. A good method of paying these off is to pay the minimum on everything except the one item you're trying to pay off. For that one debt, pay as much as you can. Then move on to the next debt.
For example, if you have $500 extra to pay down debt (after paying all the minimums), pay that entire $500 on the smallest balance.
There is one other thing that you may need to work on, that you didn't mention, and that is an emergency fund. If you do not already have one, you will need to set aside 6 months of your living expenses in a savings account, money market, or CDs. Since you are setting aside money for a home, I don't think it would be a problem for that money to have dual purposes - serve as emergency fund and a housing fund. However, once you get closer to moving, you will need to add to your savings so that you still have emergency fund money left in savings after you pay for your home.
