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paying off student loan debt vs. buying a house
my story:
i'm a recent college graduate (age 22) and have a degree in psychology. i started dancing 2 months ago to pay off the loans (and to live on while i attend graduate school). i currently live with a parent (to pay no rent) while i'm in school, which i'll be attending for 2-3 years getting an m.a. in art therapy and a marriage and family therapy license. i have borrowed about $100,000 in student loans to attend undergraduate and graduate school. i have no credit card debt and have never paid interest on a credit card (always paid in full).
a friend recently suggested that i invest in something like a classic car and/or real estate. my earnings from dancing so far aren't great but they're getting better. what to do with the earnings? pay off my student loans now or buy real estate and charge people to rent it in order to get some extra income?
what would you recommend?
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Re: paying off student loan debt vs. buying a house
If you can afford real estate in San Fran, my hats off to you honey! ;)
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Re: paying off student loan debt vs. buying a house
Well, I wouldn't invest in some car. There is a very limited market of people who would be willing or needing something like that.
I think you need to look at it from two points of view. One is cash flow and the other is long term investment.
If you can have the house rented for the mortgage payment each month with some extra gravy I would say the answer is obvious. There are other risks with tenants pouring concrete down the toilet or they move thier extended family into the house and the city comes looking for you as if YOU did something wrong. Don't rent Section 8 I can tell you that.
Long term, if you can carry the payments in your cash flow, it seems like a good idea because you would end up with a house and a paid off loan.
I suspect housing in California will become more and more expensive because there are more and more people moving there all the time. Illegal immigration is good for the housing market that is one thing for sure and California isn't going to do anything about that!
But for me, I would eliminate the debt to a "manageable" level - what ever that is for you - for me it would be six payments left - before moving on to a new debt.
Plus - what is mom and dad going to do if you are buying a house and yet living in theirs for free?
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Re: paying off student loan debt vs. buying a house
well, the first 'investment' that the IRS and Cal FTB will be expecting is about 40% of your gross earnings be spent on federal income tax, state income tax, self-employment tax etc.
Also, there are a plethora of anecdotal news stories now circulating about the 'total costs of ownership' of rental properties (mortgage plus taxes plus insurance) now being much higher than the market price for rent which can be charged - especially in 'bubble' areas (like San Francisco).
If the resale value of an apartment building is not rising, this leads to conditions where the landlord winds up paying far more money per month in mortgage plus property taxes plus insurance plus upkeep/repairs than they are able to recoup from tenants via market-priced rents.
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Re: paying off student loan debt vs. buying a house
Since student loans are low interest (but high cost, I'll explain later) and a property will increase in value, creating cash flow (if you buy properly) I would say buy a property, rent it out, and pay off the loans with the income.
I say student loans are high cost because of the rediculous cost of tution. I have so many friends that owe 50-100K in student debt, but only earn half that (or less) in the profession that they earned with the costly degree.
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Re: paying off student loan debt vs. buying a house
Also, keep in mind that rent should cover ALL expenses...mortgage, taxes, insurance, etc. Otherwise, you will find that you have no "income" or "cash flow" from the property. If you are interested in Real Estate investing, then make sure you really learn up on it. It's not THAT hard, but it's a matter of good sound judgement and knowledge.
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Re: paying off student loan debt vs. buying a house
thanks for the advice, all.
as of yet i'm just planning for the future with this money i'm earning (after i get the dancerwealth home study course i should be making more). as for buying real estate, can you point me to some links/books on how to do it? i confess that i'm very uneducated about stocks/bonds/mutual funds/mortgages and other financial items. as for buying real estate and living at a parent's place for free....the parent doesn't know that i dance. it would all be swept under the rug until i got my master's degree and m.f.t. license and moved out.
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Re: paying off student loan debt vs. buying a house
If you had the money to hire abunch of contracters and designers and stuff (like 50k) you could do house turnaround! But that's risky and I think if you had 50k lying around you wouldn't be making this post, so...
Nevermind!
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Re: paying off student loan debt vs. buying a house
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Originally Posted by TheSexKitten
If you had the money to hire abunch of contracters and designers and stuff (like 50k) you could do house turnaround! But that's risky and I think if you had 50k lying around you wouldn't be making this post, so...
Nevermind!
Well, actually flipping can be done in some marketplaces even now - but one really needs to know how to stay on budget, how to manage contractors (ie sit there and answer questions about "do you want this? do you want that?") and then someone to sell it without burning into your margin to tightly.
An interest only loan is good for house flippin. It is NOT good for house livin.
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Re: paying off student loan debt vs. buying a house
I know I am the conservative lone voice here.
I would pay off the student loan debt first. Interest rates change and so does income earning potential. If anything changed in your life could you pay for the student loans plus this other investment plus living expenses.
I have seen people get strapped by rental properties because the tenants don't do what they are supose to and the owner has no muscle to make them. They try to sell the rental property but can't.
I have also seen folks who move out after school and cant make ends meet because they are drowning in debt.
Considering all the variables in this equation I would go with the safest bet and pay off the student loan you have now.
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Re: paying off student loan debt vs. buying a house
From the standpoint of a professional, we are meant to recommend that you buy something ... anything!! So that we can make a cut.
But really, $100,000 in loans and you are thinking about borrowing more in a property market that is already very high and the evidence (that I have seen, at least) suggests that it won't last. Are you sure?
I know that student loans are charged at minimal rates of interest, but $100,000 is still $100,000. If it were me, I'd be trying to get that down to a number that doesn't keep me awake at night.
The problem isn't now. It comes in a few years time, when you want to buy a house for yourself and your professional income isn't amazing because you are still really just starting out in a long career. At that point, student loans will be the bane of your life and you will wish that you had paid them down.
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Re: paying off student loan debt vs. buying a house
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Originally Posted by StuartL
From the standpoint of a professional, we are meant to recommend that you buy something ... anything!! So that we can make a cut.
But really, $100,000 in loans and you are thinking about borrowing more in a property market that is already very high and the evidence (that I have seen, at least) suggests that it won't last. Are you sure?
I know that student loans are charged at minimal rates of interest, but $100,000 is still $100,000. If it were me, I'd be trying to get that down to a number that doesn't keep me awake at night.
The problem isn't now. It comes in a few years time, when you want to buy a house for yourself and your professional income isn't amazing because you are still really just starting out in a long career. At that point, student loans will be the bane of your life and you will wish that you had paid them down.
hmmm. well, these were ideas i was just considering. thanks for the input.
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Re: paying off student loan debt vs. buying a house
If you're specializing in the field of psychiatric medicine, you can pay off part of your student loan debt by working a "non-profit" residency.
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Re: paying off student loan debt vs. buying a house
I know in some states if you work for the school system and sign a 5-year will work contract depending on the school area they would pay your school loans off. If you don’t mind working with kids maybe you could be a school counselor for a couple of years and get them to pay your loans for you. Just a suggestion.
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Re: paying off student loan debt vs. buying a house
I would also add that in regard to gov't backed student loans at least, the opportunity is still open to convert to a 'consolidation loan' (i.e. SMART Loan) which allows you 'refinance' existing student loans to lock in a fixed interest rate of 6.125% or less
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Re: paying off student loan debt vs. buying a house
^ ^ I was going to suggest the same thing. Consolidation locks student loans into a set rate. To consolidate loans, you do not need to undergo a credit check or income check...it is automatically approved for anyone with student loans that are not defaulted.
If I were you, I would do as Vamp said and pay down loans first. Even though the interest is very low, the accrued interest on $100,000 is still more than desirable. Hells, I only had $11,000 in total student loans, but before loan consolidation, my payments were $100 something per month. (This doesn't sound like much, but at the time I was underemployed and then became unemployed) I can only imagine what the payments would be for a loan in the 6 digits! HOWEVER, I do not think I would necessarily pay the student loans directly. With my student loan, all of my money gets applied to the payments and not towards the principle. Also, my interest rate on my student loan is smaller than the interest rate on my ING savings account. So maybe it would be best to make the required student loan payments, but then put extra money in a high interest savings account until you have enough money to outright pay off the student loan? I'm toying with this idea for myself because it annoys me that my more-than-minimum loan payments haven't been applied to the principle balance.
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Re: paying off student loan debt vs. buying a house
Oh wait...two more things...
If you are in graduate school, are student loan payments even required yet? I thought student loans do not become due until 6 months after you've stopped attending school as a full-time student. Sure unsubsidized loans still accrue interest during the period that you are in school and exempt from making payments, but nothing is due unless you're out of school.
And secondly, if you are still in school, doing the whole mortgage thing seems like it will take up a lot of time, effort, and energy. Are you sure you want to put forth that much effort/time on top of all the time you need to devote to graduate school and dancing? Whereas with paying down student loans, all you have to do is earn the money, deposit the money, and write checks. Just a thought.
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Re: paying off student loan debt vs. buying a house
Re PhillyDancers last point ... very good. What would be the point of buying a property, working on it, letting it and failing school??
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Re: paying off student loan debt vs. buying a house
hmm...good point. the fact is that i hate owing people money (hence never having to pay interest on a credit card). i've paid back about $700-$1000 in interest on some loans while i was in undergraduate school just to "get some of the payments over with." of course, loans don't work like that.
loans seem to be like starfish. yes, starfish. if you try to get rid of starfish by slapping them and cutting them up, their pieces will form into new starfish. loans with interest seem to work the same way.
by the way, i consolidated some of my loans back in june. as for the house, i really want to own a house here in the bay area someday. i wonder if that's feasible.
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Re: paying off student loan debt vs. buying a house
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as for the house, i really want to own a house here in the bay area someday. i wonder if that's feasible.
Again not wanting to get too political, but where local housing markets, job markets, regulated rents / zoning / Homeowners Associations, and property taxes are concerned that's somewhat difficult to avoid. San Francisco has a 'situation' which is likely to have profound effects on real estate purchase / resale pricing and landlord 'payback' on the purchase of rental properties ...
... just my personal opinion, but it's very likely that there will be a large number of 'distressed' sellers in the San Francisco area a couple of years from now which will allow people with a large down payment saved and good credit to buy San Francisco property at bargain prices (compared to today's prices at least).
I got a serious chuckle from #31 ...
(snip)"# "Property in the Bay Area is a luxury good, and so will be less affected by economic downturns."
FALSE. 82% of last year's Bay Area mortgages were ARMs, and ARM loans are not taken out by the rich. People on the border of bankruptcy take out ARMs because they can't afford fixed rate loans. The rich don't have loans at all.
Many of these ARM loans have exceptionally deadly repayment terms, and so are known as "neutron mortgages". Like the neutron bomb, they destroy people, but leave buildings standing. They are also known as "suicide loans"."(snip)
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Re: paying off student loan debt vs. buying a house
wow, melonie....how do you know so much?
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Re: paying off student loan debt vs. buying a house
I don't really 'know' all that much ... but I spent lots of years listening to drunk wall street brokers and NY investment bankers and Manhattan corporate takeover attorneys and various 3 piece suit corporate headquarters execs, occasional UN representatives and celebrities etc. gossip amongst themselves in VIP rooms --- all the while assuming that the 'dumb blonde with big tits' sitting on their lap didn't understand a word of what they were talking about !
Now that I'm just about retired altogether from live dancing and the internet, my 'job' is to research financial markets so that I can make smart and profitable decisions re how to best manage my own investments. There is a ton of info available, but much of it requires that one do a fair amount of 'digging' rather than blindly accepting what the 'talking heads' on the financial news channels are spewing.
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Re: paying off student loan debt vs. buying a house
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Originally Posted by Melonie
I don't really 'know' all that much ... but I spent lots of years listening to drunk wall street brokers and NY investment bankers and Manhattan corporate takeover attorneys and various 3 piece suit corporate headquarters execs, occasional UN representatives and celebrities etc. gossip amongst themselves in VIP rooms --- all the while assuming that the 'dumb blonde with big tits' sitting on their lap didn't understand a word of what they were talking about !
Now that I'm just about retired altogether from live dancing and the internet, my 'job' is to research financial markets so that I can make smart and profitable decisions re how to best manage my own investments. There is a ton of info available, but much of it requires that one do a fair amount of 'digging' rather than blindly accepting what the 'talking heads' on the financial news channels are spewing.
good for you!
i'm somewhat envious because all of the financial terms and events just make my head spin. i still don't understand why anyone would invest in the stock market when they can just keep their money close to them. that's how ignorant i am! *laughs and wails*
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Re: paying off student loan debt vs. buying a house
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i still don't understand why anyone would invest in the stock market when they can just keep their money close to them
- basically two reasons. The first is that the rate of return available on 'money kept close to you' is almost always very low i.e. 1 year CD's pay 5%. As such, it's questionable given the real rate of US inflation whether or not this sort of money is able to keep pace in terms of maintaining its 'purchasing power'. In comparison, a well chosen stock or fund can return 20% plus (but flip side is that a poorly chosen stock or fund could lose 20% plus)
the second is tax treatment. Interest earnings on 'money kept close to you' is taxed as 'ordinary income', which for residents of high tax states like NY and CA probably means a combined federal + state + local tax rate in the 30-35% ballpark. In other words, after paying taxes, the 5% interest earned on a CD drops to 3%. On the other hand, with stocks and funds, any that are held for a year between buying and reselling qualify for tax treatment as a 'long term capital gain' where the tax rate is on the order of 15%. Thus that winning stock that gained 20% in a year still translates into a 17% gain after tax.
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Re: paying off student loan debt vs. buying a house
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Originally Posted by Melonie
- basically two reasons. The first is that the rate of return available on 'money kept close to you' is almost always very low i.e. 1 year CD's pay 5%. As such, it's questionable given the real rate of US inflation whether or not this sort of money is able to keep pace in terms of maintaining its 'purchasing power'. In comparison, a well chosen stock or fund can return 20% plus (but flip side is that a poorly chosen stock or fund could lose 20% plus)
the second is tax treatment. Interest earnings on 'money kept close to you' is taxed as 'ordinary income', which for residents of high tax states like NY and CA probably means a combined federal + state + local tax rate in the 30-35% ballpark. In other words, after paying taxes, the 5% interest earned on a CD drops to 3%. On the other hand, with stocks and funds, any that are held for a year between buying and reselling qualify for tax treatment as a 'long term capital gain' where the tax rate is on the order of 15%. Thus that winning stock that gained 20% in a year still translates into a 17% gain after tax.
well explained! hats off to you, melonie!