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The Simple Dollar

Student loans or house downpayment? Where to spend $25,000.

Student loans worth $25,000 will start accruing interest in November, but a young couple wants to buy a house in 2013. Should they pay off the student loans or buy a home? See question No. 4 in this reader mailbag.

By Guest blogger / March 4, 2012

In this 2011 file photo, Gan Golan, of Los Angeles, dressed as the 'Master of Degrees,' holds a ball and chain representing his college loan debt during Occupy DC activities in Washington. One young couple seeks advice about whether to pay off their student loans or use the money toward buying a home.

Jacquelyn Martin/AP/File

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What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.

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The Simple Dollar is a blog for those of us who need both cents and sense: people fighting debt and bad spending habits while building a financially secure future and still affording a latte or two. Our busy lives are crazy enough without having to compare five hundred mutual funds – we just want simple ways to manage our finances and save a little money.

Recent posts

1. Is more retirement savings necessary?
2. Netflix streaming series
3. Imminent financial disaster
4. Student loans vs. house purchase
5. Paper books or e-books?
6. Mixing and matching investment firms
7. Quit claim deed and taxes
8. Starting a professional support group
9. Roth tax imbalance
10. Lethargy after the sale

I spend significant time each day (at least a couple of hours) engaged in personal projects. I’ll work on learning about something new, reading a really challenging book, or building something.

Yet, I find that my list of “projects to be done” grows longer rather than shorter. I have so many things I’d like to try or like to spend my time doing that I never find time to do them all and instead discover more I’d like to do than I have time to do them in.

When I was a teenager, I would often be bored. I don’t think I’ve been bored in years.

Q1: Is more retirement savings necessary?
I am 25 making a little over 40k a year. I was very lucky my parents were able to pay for my college education, have no reason to get a car, and am not looking to pick up a mortgage right now. I have a very healthy emergency fund and everything is looking pretty rosy. My employer contributes 5% to a traditional IRA regardless if I put anything in. I am currently putting in an additional 12%, but worry that I should be putting money into a separate Roth IRA, while I am being taxed at a lower rate than what I anticipate later in my life. Any advice?
- Charlie

I agree with you, Charlie. You should be putting at least some of your money into a Roth IRA to supplement the traditional one.

However, I don’t think a person should just go all Roth or all Traditional/401(k)/403(b). The reason for that is that we simply don’t know what tax rates are going to be like in the future. If I were in your shoes, I’d hedge my bets and have money in both.

One final note: I would make absolutely sure you’re not bumping up against any contribution caps. My quick math based on what you said above indicates that you might be very close to your IRA contribution cap.

Q2: Netflix streaming series
You talk a lot about how the most television you and your wife watch are series on Netflix streaming and how that’s enough to make you strongly consider dumping cable. Can you give me some examples of what you’re talking about?
- Alan

OK, here’s forty series well worth watching on Netflix streaming. Remember, these are series, making up many hours worth of viewing each. I tried hard to mix up genres here so there would be something for everyone.

30 RockArcherArrested DevelopmentBattlestar GalacticaBonesBreaking BadCosmosDoctor Who.Downton AbbeyEurekaFamily GuyFireflyFriday Night LightsKen Burns: BaseballKen Burns: The Civil WarKen Burns: The WarKing of the HillLife on MarsLostMad MenMan vs. WildMythbustersThe Office (U.K.)The Office (U.S.)Parks and RecreationPortlandiaRescue MeSherlockSlidersSons of Anarchy.South ParkStargate SG-1Star TrekStar Trek: Deep Space NineStar Trek: EnterpriseStar Trek: The Next GenerationStar Trek: VoyagerTorchwoodThe Walking DeadThe X-Files.

If you have a good internet connection, you already have access to news and weather. Add this mountain of good programs (and more) for $9 a month on top of that and the reason for having a cable box and internet access begins to seem questionable.

Q3: Imminent financial disaster?
I am due in a few days with our first, a little girl. I am the major bread winner in our household I make about 48,000 and my husband makes about about 22,000. There are days where i have no clue how we can spend all that money… Now we are not huge spenders and we avoid credit cards unless we can get 0% for a year, like we did with our range and washer/dryer.

Our major bills are the mortgage $706, my leased Prius $280 and my husband truck $330, and our grocery bill… but I’ve been working hard on our grocery spending because at times I think we were spending 1000 a month on groceries, and takeout…

Two days after we bid on our now home we found out that we were pregnant… and all of our savings went into our down payment. We haven’t been able to save what we need to cover my salary when I’m out on maternity leave…. we live in ny so I will get 170 a week for 3 of the 4 weeks I’m out on disability. we have been able to save 1800 so I’m so worried about not being able to pay all are monthly bills. I plan on working right until i go into labor, Ive been feeling pretty good at this late stage, so we’ve been lucky.

I feel like we’re in such a rut. I can’t imagine what one month of no pay is going to be like. It seems like every time I project our costs I’m still spending more than expected so we won’t have as much savings as I expect to have…

Please your advise is greatly needed
- Marcia

You just explained why an emergency fund is vital. Sometimes life just knocks you for a loop.

If I were you, I’d rely on that $1,800 for an emergency fund to get you through that month. In the run-up to the baby’s arrival, don’t buy a bunch of stuff. Keep your purchases to the minimum. Don’t buy random things like wipe warmers that you basically don’t need. Buy clothes for the baby at a secondhand shop. Don’t be ashamed to have a baby shower or two and tell the person that’s hosting it that you really need functional stuff like diapers.

You’ll make it through. You just have to be on the ball with smart choices between then and now and you also have to not be down on yourself.

Q4: Loan debt and house purchase
I am a graduate student with $25k in subsidized Stafford loans. I am still in school; thus, the loans are not accruing interest and I don’t have to pay them back yet. I recently got a full-time job and have been able to save up the full $25k to re-pay the loans. However, my husband and I are hoping to buy our first home by April 2013. I am due to finish school in another couple of months, so taking the six-month grace period into account, the loans will start accruing interest in November.

The money I have saved for the loan repayment would be a big help in our house savings fund, because it could make the difference between us having to rent for only one more year (April 2012 thrugh April 2013) versus having to sign on for another full year after that in order to save up a minimum of 20% down payment (we are in a relatively high cost-of-living area).

1) Since my loans are not accruing interest and are not due yet, can I put my savings (or part of my savings) into our housing fund? This would necessitate accruing some interest on the loans since we won’t be ready to buy until spring of 2013 and the loans will start gaining interest in November 2012. The interest rate on the loans (after the grace period) is about 6%.

2) Which option is better for our mortgage application? In the banks’ eyes, is it better to (a) have less money in savings, but no debt or (b) have more money in savings but with student loan debt?

Other details: My husband and I have no debt other than my student loans and we both have excellent credit scores (over 750); we also have our emergency savings account funded (only for about three months’ worth of expenses though…we’re still working on it) and are contributing 15% of our salaries in retirement.
- Amanda

A person’s first job out of college often doesn’t wind up being their permanent job. In fact, if I were in your shoes, I would anticipate some career changes in the next five years as you find what really clicks with you.

Because of that, I wouldn’t buy a house just yet. It’s great that you saved for it, but I would hold off. The last thing you want to do is buy a house early next year just to have your department cut and you find yourself being the lowest person in seniority, or to discover that you actually don’t like your job situation. Then you’re stuck in your current location with a house and don’t have the flexibility to move.

Hold off on the house for a year or two, rent, and save up some more money. I’d pay off that whole loan when the interest starts just to get it out of the way. You’ll find that doing these things gives you the life and career flexibility you’re going to want in the next few years.

Q5: Paper books or e-books
My lovely wife Amy gave me a Kindle for Christmas along with a bunch of credit to Amazon to buy some books. I really like the reading experience on the Kindle and I’ve read several books on there already.

You’ve owned a Kindle for longer than I have and so I have a few questions for you. Do you buy many books on your Kindle? Do you buy more than paper books? How do you decide which to buy? Has having a Kindle made you spend more on books?
- Devin

Most of the books I buy on the Kindle are from the Kindle Daily Deal or from the discounted Kindle book list. I also have it loaded up with classics and other items from the Kindle free book collection. Most of the relatively expensive books I buy for the Kindle are from gift cards that people sometimes give to me as gifts.

I still use the library for most of my new releases – and often for older books, too. The library is just an enormous bargain.

I don’t buy many paper books for reading at this point, though I do buy them for reference. For instance, if I see a great cookbook, I’ll add it to my collection. It just functions really well in the kitchen.

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