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Should I Pay Off My House or My Student Loans First? – Kem

“Dear Steve,

I am finally in a place in my life where I am earning enough money to pay my bills and have a little left over. After buckling down and sacrificing (and selling) a lot, the only debt I have left, besides my mortgage, is my student loan which stands at a little over $100k at about 5% interest.

To date, I owe about the same amount on my student loan as I do my mortgage, and they both have the same interest rate. I am currently paying my student loan on the IBR repayment plan, and qualify to have my loan forgiven in 10 years (now 9).

There was a period in my life, that wasn’t so long ago, where I wasn’t able to feed my child, let alone pay for day care or keep the lights on and I made just enough not to qualify for any benefits.

As a single mother with a toddler (who doesn’t get any kind of support either financially, emotionally or physically), I am terrified of going back to that dark period. I bring home about 4k a month, and with my excess, I realize that I could buckle down (and by “buckle down” I mean ramen noodles and Cheerios) and pay off my student loan OR my house in about 5 years.

Do I buckle down and pay off my student loan even though I know that if I only paid the IBR minimum in 10 years the balance would be forgiven?

Even if it would take every last free cent I have? Do I pay off my mortgage, knowing that I’ll at least have a roof over our heads and I can defer my student loan if hard times hit?

Do I pay my IBR minimum and hoard as much money as possible, invest it and try and get a higher rate of return?

Kem”

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The Answer

Dear Kem,

Should I Pay Off My House or My Student Loans First?   KemI think we need to recognize what is most likely driving your current mission might just be a fear of debt and as you said, “going back to that dark period.”

In my book getting out of debt is about balance. I can’t see how it makes any logical sense to rush to pay off your debt early and direct every penny towards that if you are avoiding building an emergency savings account and saving for retirement.

See The Saddest Avoidable Mistake People Make When Getting Out of Debt to put this in perspective.

So My advice is to stick with the IBR, which you are going to have to qualify for each year, start building your savings account and participating in any employer sponsored retirement plan up to the maximum matching amount, and then let’s see what is available to use to pay down the mortgage.

Your comment about the IBR forgiveness in ten years worried me a bit. With the IBR the loan is forgiven after 25 years of payments. The Pay as You Earn Plan is forgiven after 20 and the Public Service Loan Forgiveness program is forgiven after 10. You can find out more in my guide here.

Another alternative is to save up what the extra you were going to pay the mortgage company each month and then make one yearly additional big payment.

Don’t let your fear of the past control your financial management in the present and sacrifice a better financial future.

Please post your responses and follow-up messages to me on this in the comments section below.

Big Hug!

Should I Pay Off My House or My Student Loans First?   Kem
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About Steve Rhode

Steve Rhode
Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.
  • Kem

    I like that quote, and you are absolutely right, I have a fear of debt, or rather, a fear of not being able to take care of my child. I guess I should’ve mentioned that my emergency fund is funded, I contribute up to the match in my 401k (plus I’ll have a pension coming later in life) and my student loan falls under the Public Service Forgiveness Program. So, even if I don’t feel like my current house is my “forever home”, would you still aim for paying off the mortgage before the student loan or investing?

    • http://GetOutOfDebt.org Steve Rhode

      Since helping people from 1994 on your situation is one that I see occasionally but not as often as you would think.

      Honestly it looks like you are oversaving out of fear. It is just as real a phenomenon as overspending. Overspending is typically brought about in an unconscious effort to use shopping as a way to improve self-esteem and reduce stress.

      Oversaving in my experience is typically a way to unconsciously try to mask financial fear after having had a difficult experience in the past or fear of being able to care for oneself.

      Life is about balance and so are finances. For most Americans there is going to be a massive retirement crisis. For some, maybe you, there is going to be a massive I didn’t get to enjoy life because I was so worried about my debt crisis.

      You have a to build a life that balances both financial prudence and allows you to enjoy this journey with your child.

      Which debt should be paid off first is really a clear decision. Mathematically it is the one with the higher interest rate.

      But I would actually suggest you slow down your repayment so you don’t have to live on a ramen noodle budget and instead make room to enjoy life even if that means it takes longer to pay back your debt.

      Consider this, what will be accomplished if you do the ramen noodle approach for the next five years and the day after you pay off the debt you get hit by a bus?

      Your toddler will be five years old and will have only known a life of what?

      It’s okay to be afraid but you know what, it’s okay to create a budget that allows you to have fun as well.

      It appears you are comfortable with your emergency fund and you are doing a good job of saving with your employer sponsored retirement plan.

      With the extra money you were going to use to focus on the student loans and mortgage I would suggest you use 1/3 for the student loan, 1/3 for the mortgage and 1/3 to just go out and have fun. Blow it. Do something crazy. Be silly, Enjoy life. It’s a one way trip.

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