Existing College Debt

13 Replies

I’ve Been very fortunate this past year and landed a job that allows me to live a more comfortable life financially than I’m used to. I have a family situation that will allow  for a live and flip and ultimately allow for 3 different rental properties (I’m going to expand on this in a different thread). 

I’ve acquired about 60k worth of Government subsidized loans while in college. My family lives below our means but I don’t make so much that I could just pay off these loans in 3-5 years. I’m wondering if these should be paid off before I begin investing or just keep paying them over time?  I understand the obvious benefits of being debt free but are their any advantages?

Sorry about the formatting currently on mobile.

I understand your challenge.  It seems like a conflict to be financially responsible, while also trying to get ahead in the investing world.  For this, you will need a pen and paper (or an excel spreadsheet if you are anything like my husband).

Some things to consider:

Will the money cost me more as a student loan, or an investment loan?  For that, I would compare interest rates and payment terms.   If the student loan interest rate is lower than the investment loan proposed rate, then it may be better to use any funds toward the investment loan in order to minimize the loan balance that you have to pay the higher interest rate on.

What will I lose by doing either option?  For the option to pay your student loan, it may be that you lose time and market value of an investment property.  For the option to buy now and maintain your student loan, it may be that you lose the ability to qualify for the property you want because your debt to income is too high, or that you lack the funds for rehab or maintenance.  

What will you gain by either option?  For the student loan, it may loosen your financial burden, and allow you greater opportunities for different property types or conditions.  For the buy now option, it may provide you with enough cash flow that the investment can make the student loan payment for you!

Without knowing the EXACT details, it is hard for anyone else to determine which is best.  It really comes down to a personal preference based on what you are comfortable with, and how you want to use the money.

How soon do you think you could pay off the loan?  If you thought it would be a short term thing, then perhaps a balance transfer to a 0% interest rate credit card would help as it would eliminate the interest portion of the payment.  However, I must caution against doing this without a plan to pay it back within the allotted time frame, or the higher interest rate would prevail.  

Best of luck to you!!

Investing in real estate is not a method or path to get out of debt.

You need to be disciplined to be a investor. To do so you must concentrate first on eliminating all bad debt. Student loans should be cleared before saving to invest.

@Thomas S Thanks for your response.
I understand what you’re saying but I’m not trying to use rental properties as a means to pay off the debt. We are looking to buy a house and was offered to buy a relative (grandmother) house so she can downsize on the same property. When she passes I would acquire both homes.

It just seemed like a good way to get my foot in the door since we were already looking at buying a home.

I disagree with Thomas S. Why would I pay off a 5 of 6% student loan when I can make a 20% return in real estate? I have a student loan payment of like $500 a month and the cashflow off my first owned in cash investment property pays for that loan amount. On to the next one. As long as the student loans are fixed, put your money where you get the best return. That is being disciplined.

Updated 6 months ago

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Updated 6 months ago

Think about it this way. I now have an asset that covers my student loan payment. After the student loan is over, I can still sell the property or keep it as a cash cow. The moment you decide to pay off the student loan, the moment that money is gone. I can do a cash out refi even if I choose and get my money working again quicker if I want. I also learned a whole heck of a lot on my first deal and will apply that knowledge toward what will be a long relationship with real estate. I won't overleverage, but if I can have at east 40% equity in my properties, I think I'm playing it fairly safe.

Originally posted by @Thomas S. :

Investing in real estate is not a method or path to get out of debt.

You need to be disciplined to be a investor. To do so you must concentrate first on eliminating all bad debt. Student loans should be cleared before saving to invest.

 I have to disagree with this point of view. The consideration should be done from a financial return point of view. What are the rate/ rates on your student loans? That is your rate of return on any principal payments. If you can get a higher rate of return by investing that money elsewhere, than you are better off doing so. Just be aware that principal payments are a risk free return essentially, while other investments may be more risky.

For example, I have about $60k in student loans. Those loans are bundled, but made up of several separate loans whose rates are about 3.5%, 4%, 5.2%, and 6.8%. If I invest in real estate, I may be able to get returns in excess of 10-12%. if I invest in stock market I may be able to average 8%. But if I make principal payments on my 6.8% loans, I "earn" 6.8% on that money. My intentions are to payoff the 6.8% loans, because that return is risk free. I have not decided whether or not I will pay off the 5.2% loans, since it may be possible to make returns in excess of that. I have no intention of making any principal payments on the lower interest loans, as I cannot get an interest rate like that anywhere else except a personal residence, and even that would be tough.

Your decision will also be effected by your debt to income ratio. If your student loan payments are $500 a month, that may make it difficult to qualify for a mortgage on an investment. In that case, you may consider using your money to pay down your loans. Also affecting your decision is your risk tolerance. If you avoid risk at all costs, pay down the loans to get instant risk free return, of course if you fear risk, real estate may not be for you anyway.

Hope I helped.

@Cara Lonsdale thanks for the response! My wife is the excel pro, I’ll have to sit down with her and work this out.

I personally would pay off the student loans. They will likely throw your debt to income ratio off which will limit how much financing you can get.

Personally, I wouldn’t want to keep any debt that isn’t real estate related and would pay any such debt off as quickly as possible

Correct me if I am wrong here, but real estate income is income. I see people keep mentioning that student loan debt throws off the dti. It may take a year or two for the bank to qualify rent from an investment property as income, but it will lower your dti.

The reason why you need to pay off your debts first is because they are an anchor around your neck. The financial obligation can result in bankruptcy during those investment periods when you hit hard financial times. You never want other debts, student loans, credit cards, car payments etc. to be the ultimate cause of your investment collapse. 

Anyone with bad debt must first discipline themselves to live debt free before they should take on the very high risk of investing.

Financial debt commitment on top of the risks of investing is a recipe for failure.

@Thomas S. that’s a good point. It’s not something you want to here but it really seems necessary.

@Forrest Holt Seek pre-approval and see if you qualify given the amount of your debt vs. income.

If they approve you for an amount that allows you to invest then of course go for it.

Rich Dad - Make your money work for you, don't work for your money.

Cheers!

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