Down Payment vs. Student Loans: How to Decide Where to Put Your Money

You’ve got student loan debt. You’d like to buy a house. Is it better to pay off the student loans first before you begin saving for a down payment on the house?

This is a common question for U.S. homebuyers. On one hand, paying off student loans before you save up for a down payment might help you qualify for a better home loan because you’ll have less debt. It could also give you the psychological benefit of knowing that you’re officially free from those monthly student loan payments.

On the other hand, waiting to save for a home means being stuck as a renter for longer. Plus, housing prices, already high across most of the U.S., will have time to go even higher before you’re ready to buy.

It’s no secret that student debt can be an obstacle in meeting other financial goals. One study from the National Association of Realtors found that of first-time homebuyers who struggled to build up a down payment, nearly half said student debt delayed them in saving for a home.

It already takes longer to save a down payment now than ever before. In June 2001, an average first-time homebuyer needed about six years to save a 20% down payment, according to home-buying start up Tomo. Now, it regularly take homeowners the better part of a decade, Zillow reports.

Pair that growing challenge with rising average student debt loads and longer loan repayment terms, and you’ve got a perfect storm of competing financial challenges: save a down payment to buy a house or pay off student loans? To figure out which suits your personal financial situation, answer the following three questions:

What are your other financial priorities?

Can you buy a house before you pay off your student loans? The answer, according to multiple financial planners, is “it depends.” All of them say that an outstanding student loan balance doesn’t have to kill your dreams of homeownership.

But the decision to focus on saving for a house before you pay off your student loans is one you should make in the context of your broader financial plan. Two to three financial goals are the most anyone can work on at one time, says Kristi Sullivan, a Denver financial planner, so make sure you’ve built a solid financial foundation before you begin saving for a home.

You’ll want to pay off any credit card debt. This debt almost certainly carries a higher interest rate than either your student loans or a mortgage, so retire it first. Then compare the rates on other types of debts you may have, like personal loans or auto loans, against your student debt.

Build an emergency fund, which should contain about six months of your core expenses. This money could see you through a period of unemployment, cushion an unexpected expense, or even help you take advantage of a sudden opportunity. Put the money in a high-yield savings account or certificate of deposit where you know you can easily access it as necessary.

Finally, begin or continue saving for retirement. The more you can put away while you’re young, the more years your investments have to take advantage of the multiplying power of compound interest. You should at least be saving an amount that lets you take full advantage of your employer’s matching funds, if that’s on offer. That’s free money and gives you a 100% rate of return, even if it never earns another dime.

How much debt do you have and how much is it costing you?

Once you’ve assured a solid financial foundation, you should weigh the specifics of your student debt balance.

In the U.S., the average bachelor's degree recipient graduates with more than $29,000 in debt. That number rises to $53,920 for master’s degrees in general, and it shoots to $132,740 for law school and a whopping $191,920 for medical school, according to the National Center for Education Statistics.

Interest rates on student debt vary, too. Rates on federally backed debt for undergraduate degrees are the lowest, and can range from 2.75% to 5.5%, depending on what year you took them out. Graduate school debt carries interest between 5.3% and 6.8%, and PLUS loans can run as high as 8%. Private loan interest rates are generally higher, often hitting double digits.

Where your debt falls within those ranges will help determine the best option for you. A couple percentage points difference in your interest rate adds up to big bucks over a period of years. For example, at 3%, a loan total of $29,000 will cost you $4,860 in interest over 10 years, while a loan balance of $246,000 would cost $39,050.

But at 5%, the amount you’re spending on interest increases to $7,900 on the smaller balance and a $67,100 on the larger one.

Put simply: If your interest rate is low, then there’s less harm in paying the minimum on your student debt while pushing more money toward your down payment fund. But the more you owe and the higher your interest rate, the better off you are paying down the balance ahead of schedule, even if it means it will take you longer to save a down payment.

Can you afford a home?

A faster student debt repayment plan means you’ll pay less interest, but it also may actually be what you need to do to qualify for a home mortgage.

If your student loan balance is large in comparison to your salary, your debt-to-income ratio may be too high for you to qualify for a mortgage at all, even if you’ve spent years saving for a down payment. In that case, a lender will make this decision for you: you won’t be able to buy a home without paying down your student loans, Sullivan points out.

Mortgage lenders typically prefer borrowers with a debt-to-income ratio of 36% or less. You may be approved if your ratio is higher, but likely with a higher mortgage interest rate. (To calculate your ratio, use Money’s debt-to-income ratio calculator.)

Keep in mind that when you buy a home, you’ll have more freedom than you do as a renter, but you’ll also be taking a bigger risk. When you own a place, you’re on the hook for insurance, taxes, utilities, and what can seem like endless expenses for maintenance. That can include everything from cleaning gutters to putting on a new roof. Given your other time commitments and expenses, including your student loan payments, can you afford to buy a place and take good care of it?

“A house is a big thing and that shouldn’t be taken lightly,” says Logan Murray, a financial planner in Tempe, Arizona. But, he adds, “You still don’t need to let student loans run your life.”

This story was originally reported and published in 2021. It was republished with updated figures on student debt and down payments.

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