Should I pay off my student loan before buying a house?
Paying off your student loan before buying a house is certainly a great risk reduction move for you. It will lower your debt to income ratio allowing your mortgage approval to go easier and it will free up more of your dollars to pay for the many miscellaneous projects that come with buying a house. I think that if you are considering paying off your student loan before buying a house that means that your student loans are an amount you can fathom paying off and that you are motivated to be rid of your student loan debt.   Go for it and pay off your student loan. It depends on the terms. Student loans are often very low interest loans which allow you to spread your costs of education over a long time without incurring too much interest. They are often government subsidized.  On the other hand, you often get better mortgage rates if you can bring a down payment for the house. Therefore, it might be more beneficial for you to use money for a down payment than paying off the student load. There may be specific answers that can be determined based on the interest rates, amounts, tax provisions, etc. But I'm here to tell you... It is much easier (i.e., less stressful) to own a home when you have less debt. Pay off any and every debt you can before purchasing a home because there will always be something requiring you to spend money once you own one. It might be a good idea, because later in life if a large expense shows up or an income source disappears, you will only have the mortgage payment, rather than a mortgage AND a student loan payment. One extremely important aspect that must be taken into consideration is the state of the housing market. If prices are rising it will probably be a false economy to delay your house purchase. Say you pay off a £5,000 student loan, thus delaying your house purchase another year you could well end up forking out an extra £10,000 on the mortgage due to the rise in house prices. Of course, if the housing market is falling then, without a doubt, pay off the student debt. IMO student loans are junk debt that should be dealt with as soon as possible.  Buying a house comes with risks and expenses (repairs, maintenance, etc) and dealing with a student loan at the same time just makes it tougher. Personally, I would try to pay off at least a few of the loans first.
The hard and fast rule is to pay off high interest loans first, but each individual's situation is different so there are some things to consider. Student loan interest is tax deductible up to $2,500.  Will your student loan interest exceed $2,500 for the year?  If so I would try to pay down the student loan first to bring down the total interest for the year so that you get as much interest back as possible on your tax return.  Also, it may be beneficial to pay off the car first to close that account so that you are only left with the 1 loan.  Once you have the car loan payment out of the way you can dedicate that amount to paying off the student loan. I'm in almost the same situation as you.  I currently have a mortgage and car payment.  In 6 months my grace period will be over, and my student loan payments will start.  I have $100k in student loan debt.  So I will have a $1,100 mortgage payment, $1,100 student loan payment, and $700 car payment (car loan is 0%).  I don't want to have 3 loans active so I will pay off my car loan in a 2-3 months to get that out of the way.  Then I will pay down my student loan by paying $700 extra every month. It isn't always clear cut that you should pay off a debt at all, particularly a mortgage. In simple terms, if you are making a better return than what the bank is charging you, and the investment meets your risk criteria, then you should not pay back the debt. In the UK for example, mortgage rates are currently quite low. Around 2.5 - 3% is typical at the moment. On the other hand, you might reasonably expect a long run average return of around 9 - 11% on property (3 - 5% rental yield, and the rest on capital gains). To make the decision properly you need take into account the following: Based on your numbers, it sounds like you've got 12 years left in the private student loan, which just seems to be an annoyance to me.  You have the cash to pay it off, but that may not be the optimal solution. You've got $85k in cash!  That's way too much. So your options are:  -Invest 40k -Pay 2.25% loan off -Prepay mortgage 40k Play around with this link: mortgage calculator Paying the student loan, and applying the $315 to the monthly mortgage reduces your mortgage by 8 years. It also reduces the nag factor of the student loan. Prepaying the mortgage (one time) reduces it by 6 years. (But, that reduces the total cost of the mortgage over it's lifetime the most) Prepaying the mortgage and re-amortizing it over thirty years (at the same rate) reduces your mortgage payment by $210, which you could apply to the student loan, but you'd need to come up with an extra $105 a month. Should I use the money to pay off student loans and future grad expenses for me? Yes.  The main drawback to student loans is that they cannot be gotten rid of except by paying them off (other than extreme circumstances such as death or complete disability).  A mortgage, car loan, or other collateralized loans can be dealt with by selling the underlying collateral.  Credit card loans can be discharged in bankruptcy. Stop borrowing for college, pay for it in cash, then decide what to do with the rest. Make sure you have a comfortable amount saved for emergencies in a completely liquid account (not a retirement account or CDs), and continue to pay off with the rest.  You might also consider putting some away for your kids' college, so  I want to get my older son into a private middle school for 2 years. They have a hardy endowment and may offer us a decent need based scholarship if we look worthy on paper I have a hard time getting behind this plan with a 238K mortgage.  If you want to apply for scholarships that's great - but don't finagle your finances to look like you're poor when you have a quarter-million-dollar house.  If you want to save some for private school then do that out of what you have.  Otherwise either rearrange your priorities so you can afford it or private school might not be in the cards for you. That said- while it was a blessing to be able to pay off the second mortgage and credit cards, your hesitancy to pay off the student loans makes me wonder if you will start living within your means after the loans are paid off.  My concern is that your current spending levels that got you in this much debt in the first place will put you back in debt in the near future, and you won't have another inheritance to help pull you out. I know that wasn't your question, but I felt like I needed to add that to my answer as well. Something else to consider, even if your friend is on the up and up and never misses a payment:  Until the house is paid off, any time you apply for credit banks will count the mortgage payment on your friends house against your ability to pay all your existing debts in addition to whatever new loan you're applying for.  If you're renting a home now, this will likely mean that you'll be unable to buy one until your friends house is paid off. All of RonJohn's reasons to say no are extremely valid. There are also two more. First, the cost of a mortgage is not the only cost of owning a house. You have to pay taxes, utilities, repairs, maintenence, insurance. Those are almost always hundreds of dollars a month, and an unlucky break like a leaking roof can land you with a bill for many thousands of dollars. Second owning a house is a long term thing. If you find you have to sell in a year or two, the cost of making the sale can be many thousands of dollars, and wipe out all the 'savings' you made from owning rather than renting. I would suggest a different approach, although it depends very much on your circumstances and doesn't apply to everybody. If there is someone you know who has money to spare and is concerned for your welfare (your mention of a family that doesn't want you to work for 'academic reason' leads me to believe that might be the case) see if they are prepared to buy a house and rent it to you. I've known families do that when their children became students. This isn't necessarily charity. If rents are high compared to house prices, owning a house and renting it out can be very profitable, and half the battle with renting a house is finding a tenant who will pay rent and not damage the house. Presumably you would qualify. You could also find fellow-students who you know to share the rent cost. "A Tweep friend asked me a similar question. In her case it was in the larger context of a marriage and house purchase. In reply I wrote a detail article Student Loans and Your First Mortgage.  The loan payment easily fit between the generally accepted qualifying debt ratios, 28% for house/36 for all debt. If the loan payment has no effect on the mortgage one qualifies for, that's one thing, but taking say $20K to pay it off will impact the house you can buy. For a 20% down purchase, this multiplies up to $100k less house. Or worse, a lower down payment percent then requiring PMI.  Clearly, I had a specific situation to address, which ultimately becomes part of the list for ""pay off student loan? Pro / Con""  Absent the scenario I offered, I'd line up debt, highest to lowest rate (tax adjusted of course) and hack away at it all. It's part of the big picture like any other debt, save for the cases where it can be cancelled.  Personal finance is exactly that, personal. Advisors (the good ones) make their money by looking carefully at the big picture and not offering a cookie-cutter approach." Of course, I know nothing about real estate or owning a home. I would love to hear people's thoughts on why this would or would not be a good idea. Are there any costs I am neglecting? I want the house to be primarily an investment. Is there any reason that it would be a poor investment?  I live and work in a college town, but not your college town. You, like many students convinced to buy, are missing a great many costs. There are benefits of course. There's a healthy supply of renters, and you get to live right next to campus. But the stuff next to campus tends to be the oldest, and therefore most repair prone, property around, which is where the 'bad neighborhood' vibe comes from. Futhermore, a lot of the value of your property would be riding on government policy. Defunding unis could involve drastic cuts to their size in the near future, and student loan reform could backfire and become even less available. Even city politics comes into play: when property developers lobby city council to rezone your neighborhood for apartments, you could end up either surrounded with cheaper units or possibly eminent domain'd. I've seen both happen in my college town. If you refuse to sell you could find yourself facing an oddly high number of rental inspections, for example. So on to the general advice: Firstly, real estate in general doesn't reliably increase in value, at best it tends to track inflation. Most of the 'flipping' and such you saw over the past decade was a prolonged bubble, which is slowly and reliably tanking.   Beyond that, property taxes, insurance, PMI and repairs need to be factored in, as well as income tax from your renters. And, if you leave the home and continue to rent it out, it's not a owner-occupied property anymore, which is part of the agreement you sign and determines your interest rate. There's also risks. If one of your buddies loses their job, wrecks their car, or loses financial aid, you may find yourself having to eat the loss or evict a good friend. Or if they injure themselves (just for an example: alcohol poisoning), it could land on your homeowners insurance. Or maybe the plumbing breaks and you're out an expensive repair. Finally, there are significant costs to transacting in real estate. You can expect to pay like 5-6 percent of the price of the home to the agents, and various fees to inspections. It will be exceedingly difficult to recoup the cost of that transaction before you graduate. You'll also be anchored into managing this asset when you could be pursuing career opportunities elsewhere in the nation. Take a quick look at three houses you would consider buying and see how long they've been on the market. That's months of your life dealing with this house in a bad neighborhood. A point that hasn't been mentioned is whether paying down the mortgage sooner will get you out of unnecessary additional costs, such as PMI or a lender's requirement that you carry flood insurance on the outstanding mortgage balance, rather than the actual value/replacement cost of the structures.  (My personal bugbear:  house worth about $100K, while the bare land could be sold for about twice that, so I'm paying about 50% extra for flood insurance.)  May not apply to your loan-from-parents situation, but in the general case it should be considered. FWIW, in your situation I'd probably invest the money. Having a loan also represents risk.  IMHO you should retire the loan as soon as feasible in most cases.   JoeTaxpayer, as usual, raises a good point.  With numbers as he is quoting, it is tolerable to have a loan around on a asset such as a home.  While he did not mention it, I am sure that his rate is fixed. If the interest rate is variable:  pay it off. If it is a student loan:  pay it off. If you can have it retired quickly:  pay it off and get the bank off your payroll. If it is consumer debt:  pay it off. Congratulations on your bonus may many more come your way. I am having a bit of trouble following your numbers but it seems you are considering PMI for the life of your loan.  Once you get below 20% loan to value, you can petition the mortgage company to remove the PMI (with conventional loans; VA and FHA have lifetime PMI). If it was me, I'd do one of two things.  Both involve paying off the student loan now.  The savings from the student loan payment will assist you in helping you meet one of the two goals below.  Also both involve getting a 15 year fixed. The first would be to buy the house now, and work like crazy to get rid of the PMI.  My goal would be to get rid of this within 18 months.   The second would be to save up enough cash for the 20% down and then buy the house.  You'd miss out on the house you are looking at, which is kind of heartbreaking.  Who is to say that a better home does not come along at the same price?  My goal would be to have the downpayment in 9 months, and really try to have it in 6 months. Being an old guy that has experience how much of a virtue patience is, I'd recommend the second option. You didn't answer my questions above, but the biggest factor if the two interest rates are similar is what it will cost you for mortgage insurance if you do not include a 20% down-payment on your next house purchase. I would take the extra money from the proceeds of the other sale to get to a 15-year loan on your next house, then put all of your extra money into paying down the student loans ahead of the 7 year schedule. I don't like paying a house off early. Houses are quite illiquid investments. Lose your job, you can't get the money out. Housing prices go down, can't get your money out. Etc. You are in a better state owing 50k more on a house and with 50k in the bank, and if that money gets you in the habit of savings and investing, all the better. Pay off the Highest interest loan rate first. You must be doing something funky with how long your terms are... If you give a bit more info about your loan's such as the term and how much extra you have right now to spend it could be explained in detail why that would be the better choice using your numbers. You have to make sure when you are analyzing your different loan options that you make sure you are comparing apples to apples. IE make sure that you are either comparing the present value, future value or amortization payments...  EDIT: using some of your numbers lets say you have 5000 dollars in your pocket you have 3 options. excel makes these calculations easier... Do nothing: in 80 months your Student Loan will be payed in full and you will have 54676.08 owing on your mortgage and 5000 in your pocket(assuming no bank interest)  for mortgage: Pay off Student loan and allocate Student loans amortization to Mortgage: in 80 months you will have $47,910.65 owing on mortgage and student loan will be paid in full For mortgage: Pay 5000 on Mortgage: in 80 months student loan will be paid in full and you will have $48,204.92 owing on mortgage For mortgage: "If I were you I would pay off these loans today. Here are the reasons why I would do this: Car Loan For car loans in particular, it's much better to not pay interest on a loan since cars lose value over time. So the longer you hold the debt, the more you end up paying in interest as the car continues to lose value. This is really the opposite of what you want to do in order to build wealth, which is to acquire assets that gain value over time.  I would also recommend that once you pay the loan, that you set aside the payment you used to make on the loan as savings for your next car. That way, you will be able to pay cash for your next car, avoiding thousands of dollars of interest. You will also be able to negotiate a better price by paying cash. Just by doing this you will be able to either afford to buy a nicer car with the same amount of money, or to put the extra money toward something else. Student Loan For the student loan, 3% is a very low rate historically. However, the reason I would still pay these off is that the ""return"" you are getting by doing so is completely risk free. You can't often get this type of return from a risk-free investment instrument, and putting money in the stock market carries risk. So to me, this is an ""easy"" way to get a guaranteed return on your money. The only reason I might not pay this down immediately is if you have any other debt at a rate higher than 3%. General Reasons to Get out of Debt Overall, one of the basic functions of lifetime financial planning is to convert income into assets that produce cash flow. This is the reason that you save for retirement and a house, so that when your income ends when you're older these assets will produce cash, or in the case of the house, that you will no longer have to make rent payments. Similarly, paying off these debts creates cash flow, as you no longer have to make these payments. It also reduces your overall financial risk, as you'd need less money to live on if you lost your job or had a similar emergency (you can probably reduce your emergency fund a bit too). Discharging these loans will also improve your debt-to-income ratio if you are thinking of buying a house soon. I wonder whether as someone who's responsible with money, the prospect of cutting two large checks feels like ""big spending"" to you, even though it's really a prudent thing to do and will save you money. However, if you do pay these off, I don't think you'll regret it."