Personal Finance

Should You Pay Off Student Loans or Invest in a House Hack?

Expertise: Personal Finance, Personal Development, Real Estate Investing Basics, Landlording & Rental Properties
52 Articles Written
Calm asian student girl sitting at desk resting after studying

A recurring question that I keep getting is, “Craig, should I pay off my student loans? Or should I invest in real estate?”

Want more articles like this?

Create an account today to get BiggerPocket's best blog articles delivered to your inbox

Sign up for free

The easy answer to this, like any highly debated question, is it depends. It depends on your risk tolerance, how quickly you want to achieve financial independence, and when you want to start investing in real estate.

The TL;DR (too long, didn’t read) answer to this is, if your risk tolerance is low and you want to play it as safe as possible, pay off the student loans. If your risk tolerance is higher and you want to achieve financial independence sooner, then invest in a house hack.

This article is going to visit two people: John and Bridget. They both have $0 in savings, make $60,000 per year ($5,000 per month or $4,000 after taxes), save $2,000 per month, and have $50,000 in student loans. The interest rate on these loans is 6 percent, bringing their monthly student loan payment to approximately $350.

Each house hack they acquire will be the same price of $300,000, and each one will cash flow for $500. In order to illustrate the point, all variables will be constant except John will play it safe and pay off his student loans, whereas Bridget will house hack while making the minimum payments on her student loans.

I know no one likes reading numbers in paragraph form. So, here is a recap.

Let’s Use These Assumptions for John & Bridget

Income

  • Income: $60,000 ($5,000 monthly)
  • After tax income: $48,000 ($4,000 monthly)

Savings

  • Initial savings: $0
  • Savings rate: $2,000 per month

Student Loans

  • Student loans: $50,000
  • Student loan interest rate: 6.0%
  • Student loan monthly payment: $350

House Hack

  • House hack purchase price: $300,000
  • Cash flow: $500

Difference

  • John pays off student loans
  • Bridget house hacks

John’s Plan: Pay Off Student Loans Now

Like we mentioned above, John is making $60,000, which ends up being about $4,000 per month after taxes. John is conservative and wants to pay off his student loans before purchasing real estate. He is super frugal, lives below his means, and is an avid follower of the financial independence movement. He saves 50 percent of his income, or $2,000 per month. All of those savings he funnels toward paying off his student loans.

With a monthly payment of $350, the additional $1,650 of his savings goes right to principal.

After just over two years, John will have paid off his student loans entirely. Then, he will need to rebuild his nest egg to save up for the down payment on his first house hack.

Related: How to Start Your Journey to Financial Freedom

By making the decision to pay off his student loans, John is delaying house hacking by just over four years—two years longer than Bridget, who we’ll visit in the next section.

For the simplicity of this article, each one of John's house hacks will provide the same exact results, and we will exclude appreciation, loan paydown, and the tax benefits of house hacking. By the end of year 20 when he paid off his student loans, he would have a total savings of $781,000.

Note: This number would be much higher (to the tune of millions of dollars) if we include appreciation, loan paydown, and tax benefits. However, that is noise that does not add to the point of this article, so we are leaving that out.

Bridget’s Plan: House Hack ASAP

Unlike John, Bridget wants to accelerate her path toward financial independence. She is eager to start house hacking, so she dives right in. She makes the required minimum payments toward her student loans, because she is confident that she can make a 6 percent return while house hacking. For that reason, she purchases her first house hack after just two years of saving up.

By house hacking as soon as she can, Bridget is starting to gain some passive income, earning $500 monthly per house hack. Each year for five years total, she adds another house hack to her portfolio. By year five, she’s earning $2,500 per month in passive income.

Again, I am simplifying this example as much as possible, so I am neither considering the other wealth builders of real estate nor assuming that she puts her additional money into another investment vehicle, like the stock market.

After house hacking and continuing to save at the same rate, by the time her student loans are paid off (year 20), Bridget would have a total savings of $871,000.

John’s Savings vs. Bridget’s Savings

Maybe I am being repetitive here, but I need to drive home the fact that house hacking will prove to have much greater rewards than just the $800K-plus Bridget can save up over 30 years. However, I am only factoring in cash flow in this example.

Cash flow is just one of the four wealth generators of real estate. If we include loan paydown, appreciation, and tax benefits, both John and Bridget would likely have a multimillion-dollar net worth, because house hacking is a powerful strategy regardless of how you look at it.

Related: The ROI on the First Year of My House Hack: 82%

Let’s look at the difference here. In year 20, John has $781,000 and Bridget has $871,000. Over the course of 20 years, even with paying the minimum down on her student loans and the most interest possible on those loans, Bridget ends up having $90,000 or 11.5 percent more in her savings account—and likely hundreds of thousands to a million dollars more in total net worth.

Conclusion

I hope this example was simple and easy enough to understand. As you can see, barring student loan interest rates going through the roof, in almost every scenario, house hacking before paying off your student loans will benefit you financially in the long-run.

It really is simple math.

Can you invest and earn a larger return on the money you save versus the interest rate on your student loans? If the answer is yes, then you pay the minimum balance. If the answer is no, then you funnel all of your money toward the student loans.

With house hacking, you almost always will get a return higher than 6, 10, or even 25 percent, because you are putting such a low amount down (3 to 5 percent).

The drawback to house hacking is that you can only do it once per year and thereby only earn those insane returns once per year. After you guarantee yourself being able to house hack once per year, then you can go about paying off your student loans.

A guaranteed return of 6 percent is pretty good in almost every scenario that’s not house hacking.

In my scenario, I was more like Bridget. I house hacked my first two properties while paying the minimum balance on my student loans. When I realized that paying off my student loans would not inhibit my next house hack exactly one year later, I decided to pay them off.

And because of house hacking, I paid off $85K of student loans in 16 months. If I hadn’t, it would have taken me over seven years!

I hope this article proves useful and gets your wheels spinning.

Now, which will you do? Pay off your student loans or get into your first house hack? Do you have any questions for me?

Let me know in the comment section below!

Craig Curelop, aka thefiguy is an aggressive pursuer of financial independence. Starting with a net worth of negative $30K in 2016, he has aggressively saved and invested to become financially independent in 2019. From sleeping on the couch and renting out his car, he was able to invest in two house hacks in Denver and a BRRRR in Jacksonville. He plans to continue to investing in both Denver and Jacksonville for the years to come. Craig's story has caught the attention of several media outlets, including the Denver Post, BBC, and many other real estate/personal finance podcasts. He hopes to inspire the masses to grab hold of their finances and achieve financial independence. Follow his story on Instagram @thefiguy!

    Brandon Moore from Central Arkanas
    Replied about 1 month ago
    Great post! I believe a lot of it comes down to the tolerance of the individual as you've mentioned. So many factors to be considered, but if a person can house hack I believe it is something hard to just pass up on.
    Michael P. Lindekugel Real Estate Broker from Seattle, WA
    Replied about 1 month ago
    kind of sorta. not really about risk at all. it is about interest or ROI. they are the same thing calculated using cash flows and IRR. Craig should have talked more about opportunity cost and the interest or IRR for each decision in the decision analysis. the decision analysis involves evaluating the interest rate or IRR for each scenario to pay off the loan or invest. if the cost of borrowing or interest rate paid is more than the interest rate earned, then the decision should be pay down the loan. the taxpayer is losing money investing instead of paying down the loan. if the interest rate earned is higher than the cost of borrowing or interest paid, then the taxpayer should invest. the opportunity cost of not investing is the delta between the possible interest earned and the interest paid. the delta can be used to pay down the loan accelerating the payoff.
    Wenda Kennedy JD from Nikiski, Alaska
    Replied about 1 month ago
    I don't agree with you all. This is all about risk -- not yields vs. interest costs. Student loans cannot be discharged in bankruptcy court. Real estate values can go down rather than up. I have a long term view on all of this. I have seen people buried alive by student loans, especially coupled with a real estate downturn for their investment properties. I currently have senior citizen tenants who are still paying off their student loans. Therefore, I always advise people to pay them off ASAP. Who wants to spend their social security checks on student loan payments?
    Craig Curelop Rental Property Investor from Denver, CO
    Replied 24 days ago
    Wenda, Typically student loan payments are at an interest rate of 3% to 6%. House Hacking will yield you returns of into the 100% or more. Assuming you are not incredibly risk averse, house hacking will make you much richer over a certain amount of time than will paying off your student loans.
    Michael P. Lindekugel Real Estate Broker from Seattle, WA
    Replied 29 days ago
    yield and interest are the same thing. student loans (government and private) can be discharged in bankruptcy when repaying student loans would cause an undue hardship. the BK court typically uses one of two tests for criteria to discharge the student loans. there are several tests. the BK court will require documentation of the undue hardship. most people filing chapter 7 and chapter 13 wont meet the criteria for discharge.
    Susan Maneck Investor from Jackson, Mississippi
    Replied 29 days ago
    In my opinion house-hacking is something best done while you are in school. With an FHA Kiddie-Condo loan this can be fairly easily done. That's when young people want to share housing anyhow. Instead of parents paying for your dorm fees they co-sign on a FHA loan and maybe help with the down. Despite the term Kiddie-Condo, the property doesn't have to be a condo but it is usually not a 300K house either. I house-hacked while I was in grad school.
    Craig Curelop Rental Property Investor from Denver, CO
    Replied 24 days ago
    Susan, House hacking is a great thing to do while in school! I recommend that to almost everyone. However, it's a great thing to do until you are no longer able to do it!