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Published: Dec 01, 2021 9 min read
A graduation cap and a house sitting side by side equally, and a woman standing between the two trying to decide where to put her money first.
Kiersten Essenpreis for 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 the one hand, paying off your student loans before you save up for a down payment might let you qualify for a bigger mortgage, because you’ll have less debt. It could also give you the psychological benefit of knowing that you’re officially out from under those college loans.

On the other hand, waiting to begin saving 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. A recent study from the National Association of Realtors found the of first-time homebuyers who struggled to build up a down payment, nearly half said student debt delayed them in saving for a home.

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Saving for a down payment already takes longer now than it did before the pandemic. It already takes longer to save a down payment now than before the pandemic. According to an analysis from home-buying startup Tomo, in August a first-time homebuyer would need about seven years and 11 months to save a 20% down payment on a median-priced home. In January 2020, the same purchaser would have needed seven years and one month.

It’s not just a pandemic trend. The amount of time needed to save for a down payment has been inching up over the past 20 years, too. In June 2001, an average first-time homebuyer needed about six years to save a 20% down payment.

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: prioritize paying off student debt or saving for a down payment? To figure out which is right for you, answer these 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 total financial life. 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.

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 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 borrower owes about $29,000 on bachelor’s degree student loan debt, That number goes to $66,000 for master’s degrees in general, and it shoots to $145,500 for law school, $202,400 for health sciences degrees like dentistry and pharmacy and a whopping $246,000 for medical school, according to the National Center for Education Statistics. From low to high, that’s a difference of $217,000.

Interest rates on student debt vary, too. Rates on federally backed debt for undergraduate degrees are the lowest, and range from 2.75% to 4.66%, depending on what year you took them out. Graduate school debt carries interest between 5.3% and 6.6%, and PLUS loans can run as high as 7.6%. Private loan interest rates are generally higher, ranging from 3.34% to 12.99%.

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.

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Can you afford a home?

A faster repayment plan means you’ll pay less interest, but it also may 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.”

More from Money:

7 Tips for Getting a Mortgage When You Have Student Loans

A Housing Economist Did the Math on How Long It Takes to Save for a Down Payment — and It's Not Pretty

How to Get Ready for the Upcoming Return of Student Loan Payments