student loans home market

Should I sell my Condo to pay off my student loans?

Michael Lux Blog, Student Loans 3 Comments

Yesterday we received an email from someone considering selling off his condo in order to pay off all of his student loans.  While we have heard of many extreme measures taken to pay off student loans, this one might take the cake.  The idea of parting with your home to have a zero balance on your student loans seems a bit desperate, but does it make sense?

Opportunity Cost

Eliminating a mountain of student debt can save thousands of dollars a year in interest alone.  From this standpoint there is a huge financial incentive to knock out the debt.  However, putting your home on the market comes with a number of costs that also have to be factored in.

For starters, you need a place to live.  While trading student loan interest rates for mortgage interest rates may seem like an improvement (more on that a bit later), there are a ton of other costs associated with any move.  Not only do you have moving expenses, but listing and selling a home usually means paying a real estate agent.  The cost of a housing transaction is very expensive and must be factored into your math.

Even if you can live in mom and dad’s basement or on a friend’s couch, these options are ultimately temporary.  If the next step isn’t buying a house or condo, it could mean that renting is in your near future.  Renting has its perks, but it can be very expensive compared to living in a house you already own.

Mortgage vs Student Loan Debt

If you are thinking about selling a piece of property, paying off your student loans, and then buying another piece of property for approximately the same price; you are essentially talking about trading student loan debt for mortgage debt.  There are major implications here.

Perhaps most importantly, failure to pay your student loans won’t get you kicked out of your house.  If you fall behind on your mortgage, foreclosure is a possibility.  While there are some programs out there for people having trouble paying their mortgage, these programs are not nearly as good as those available for student loan.  For example, if you have federal loans, you can have payments of $0 per month, or have your loans forgiven in as little as 10 years under public service student loan forgiveness.  Even private loans have programs that can get your interest rate reduced.

That all being said, there are some reasons mortgage debt is slightly better to have over a student loan.  Not only are interest rates normally a bit lower (in part because the debt is secured — i.e. they can take your home if you fail to pay), but mortgage interest is also tax deductible.  The tax benefits associated with a mortgage far exceed those for student loans.

The Emotional Perspective

For most people, their house is more than just a number on a balance sheet or an asset.  It is home.  Being able claim ownership of your little piece of the world has value that can’t be easily quantified.

While paying off student loans definitely has a certain appeal to your stress level, a blank balance sheet hardly compares to the security of a roof over your head.

Other Options

In the opinion of this writer, selling your home should be something of a last resort.  Before even considering going this route, other possibilities should definitely be investigated.

  • Can you rent out your property and use the profits to pay down your student debt?
  • Is a home equity loan an option?  (This route also has tremendous risk, but it does have some of the advantages without the transaction costs of selling your home)
  • Have you explored the student loan forgiveness options for your federal loans?
  • Have you looked into consolidating your loans on the private market to lock in lower interest rates?
  • Is getting a roommate a possibility?

One Final Thought

If one year from now you got a better job, would your decision still be a good one?  A willingness to savagely attack your student loans is a good thing, but it shouldn’t be your only priority.  Think about the different ways your life could change over the next decade.  For each potential path ahead of you, consider how your choice could affect things.  The more analysis you can do before making the decision, the better your decision will be.

  • paul

    Great article

    Quick question though.
    What if my current student loan interest is 4.2k a year while my payment obligation to the home is 10k a year. Im basically throwing away half my yearly home payment?

    Plus i would not mind renting in order to eliminate risk of home repairs and in the future, if i get a better job or income i can always save for a home and rent till then.

    I actually prefer a change in living situation and location.

    • You might want to try making a spreadsheet tracking your different options. This is one way to figure out how that 4.2k a year in interest compares to 10k a year. The breakdown of interest vs. principal could be a big factor.

  • Sher

    We have been wrestling with this decision for a couple years now, and still aren’t sure what the best move would be for our family. We bought our home as a short sale years ago and have $170k left on our mortgage at a rate of 4.0%. The housing market in our area (south of Denver) has been climbing like crazy lately and we could likely sell our home for around $350k. I owe just shy of $35k at a rate of 6.0% in student loans, and my husband owes almost $120k at a rate of 6.8%. We have about $13k in other debt that we’re chipping away at, and in the meantime my husband’s loan balance only goes up (we’re on an IBR plan for his, standard for mine). The loans weigh heavily on me, but we also love our home and probably couldn’t buy another in this area (maybe even this state) for less than $300k. We have excellent credit though, and I’m guessing we’d get around a 4% interest rate on another home loan. We both work full time with a combined income of about $80k and we have two kids (one in school the other in daycare). We’re pretty frugal but I feel our only options are to either knock out the student loan debt in one fell swoop now by selling the house (and in doing so essentially shift the debt into a new mortgage on another house), or essentially ignore his loans until the 25 years are up and the remainder is forgiven. So torn!!!