Hypothetical - $75k Equity vs $50k Student Loans

11 Replies

What would you do in this scenario?

Investment Property with equity of approximately $75k.

Student Loans of approximately $50k   (Overall Effective Interest Rate 5.25%)

Would you sell the property to pay off the loans, or keep the property?

Extra info: The property is self managed in this scenario, but does bring in $700/month cashflow after all expenses, capex & debt service.

What is the monthly payment for the student loan?

@Anthony Hornbeck Since it's hypothetical I wouldn't have gone to school and would have no student loan.

Seriously, in my area the property would be appreciating about 5%, plus principal pay down, plus cashflow. So I'd be further ahead keeping the property.

Why not tap the equity and payoff the loan? You just transfer the loan payments back into the home. Which is tax deductible too (unlike the student loans). And student loans are the worst kind of debt. You cannot get rid of it under any circumstances. I's pay it off ASAP.

@Account Closed

 I appreciate your feedback, but perhaps I'm misinterpreting some of your point. Student loan INTEREST is indeed deductible up to a maximum (I believe it's $2500). With a $50k balance at 5.25, we're really right about there.  I DO, however, concede that there are other tax benefits to property that are not duplicated via the student loans. Your point about loan forgiveness is a great point though. To some extent I suppose I hedge that risk with life insurance, etc, but I do feel it's worth considering.

I suppose I just see both sides of this argument. On the one hand, it seems to me that keeping the property is perhaps the best FINANCIAL solution, but paying off the non-mortgage debt would be very emotionally pleasing.

Should we really be speaking in utils lol? I mean this is hypothetical after all.

I appreciate all of your feedback and hope we can generate a few more answers for the survey.

I'd tap 55k in equity, pay off the 50k in student loans. and spend 5k in home improvements.

Hopefully that 5k can at least give me some ROI, and I'd have a better looking room. Still keep 20k in equity that I could liquidate if need be. Turn around and keep that $750/month and either

1) pay down the house much quicker or 2) save up and buy another house.

Don't touch the student loan. Instead, tap the equity in your investment home and reinvest it into another rental property with an ROI > 5.25%. You can then use the cashflow from the second property to pay the student loan and keep the spread.

I get the "emotional pleasing" part, but jus thank the renters every month for paying your student loan.  If I were in that situation, and sold the house to pay the student loan, I know I would later regret it.  

Originally posted by @Anthony Hornbeck :

What would you do in this scenario?

Investment Property with equity of approximately $75k.

Student Loans of approximately $50k   (Overall Effective Interest Rate 5.25%)

Would you sell the property to pay off the loans, or keep the property?

Extra info: The property is self managed in this scenario, but does bring in $700/month cashflow after all expenses, capex & debt service.

Take the rent income and pay off the student loan. Remember after you pay off the debt service which part of it is paying down debt so your equity build up over time too. When you sell your property, you also lose the income producing property. Like other suggests, if you have equity in the house, geting HELOC at low interests rates to consolidate your debt is a good way to go. If you want to sell the property to pay off the student loan, hope you can get the extra cash left to buy another property.

I wrote white a bit about HELOC on my blog. Check it out below.

Main Street Journal

Originally posted by @Anthony Hornbeck :

What would you do in this scenario?

Investment Property with equity of approximately $75k.

Student Loans of approximately $50k   (Overall Effective Interest Rate 5.25%)

Would you sell the property to pay off the loans, or keep the property?

Extra info: The property is self managed in this scenario, but does bring in $700/month cashflow after all expenses, capex & debt service.

 Why would you be tempted to pay it off.  My guess is that the property would appreciate more than the 5.25 % per year for the next few years and not just on the loan amount but on the entire value of the property.

I think people ignore risk in this whole equation. As Dave Ramsey would ask "Would you take $55K debt on student loan terms today to buy a new rental?" If not, whats the difference? I didnt suggest selling the rental. I suggested tapping the equity to pay off the loan and then take your loan payments and pay back the mortgage. That way you keep the house and pay off the loan. Technically your DTI doesnt even change. I didnt actually know student loan interest was deductible (never having had or ever intend anyone in my family to have) one of those evil monstrosities!

No way you should pay off the student loan.  5.25% debt is pretty cheap.

If you do sell the property, invest the money in two or three assets that earn 10%+ cash on cash.. now we're talking.  

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