Q: Neither my wife nor I have ever owned a home, but I’m about to spend the next two years in graduate school.
We could completely pay for my graduate school with her income. However, if we take out a school loan, we think we can save enough to put the total cost of tuition down on a house after school.
Should we take the federal loans, get out of school with that debt – which would be the only debt we have at that point – and be able to put a down payment on a house? Or, should we pay for school with our savings, get out of school with zero debt and do a 100 percent loan for the property, as we would not have enough money for a down payment.
We’re both low 30’s, have never owned homes, and have good credit.
A: While interest rates for mortgages are extremely low, interest rates on student loans are even lower. Not only that, but you can defer repayment on your student loans until six months after graduation, and some of the interest is deductible on your federal income taxes.
In my mind, that gives taking out a school loan a definite edge over saving your cash for a down payment.
In your case, I’d take out enough cash in a student loan to completely pay the bill for your school tuition. Then, if you can swing it on your wife’s income, consider purchasing a home now rather than in two years when you are done with graduate school. Use your savings for the down payment.
By doing this, you will put yourself years ahead in terms of your long-term financial stability, as each month when you pay your mortgage, you’ll build up a little more equity in your property.
Once you graduate, I assume you’ll get a job earning more money. You may then be able to pay off your student loans more quickly. Even if you follow the 10-year schedule, the interest rate will be quite low.