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 of Selling Property
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.
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.