Grads With Student Loans: Rent or Buy?

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Some college graduates are so overburdened with student loan payments that they struggle just to stay afloat.  But for those who can make their payments and even save some money, the logical next question might be: when can I buy a house?

This is a weighty question for 20-somethings new to the labor force and carrying unprecedented levels of student debt, which puts them at greater financial risk than previous generations of graduates.  Squared Away asked two financial planners from the sensible Midwest – Danielle Schultz and Mark Zoril – to help young adults work through the difficult financial tradeoffs they’ll face as they juggle student loan and car payments, retirement saving, and homeownership.

Here’s their advice:

Danielle L. Schultz, a financial planner in suburban Chicago, believes buying a house should be a 20-something’s lowest priority.

The highest priorities are building up an emergency fund and contributing regularly to an employer’s retirement savings plan.  The minimum emergency fund for a young, healthy adult who earns, say, $36,000, is around $6,000 – $10,000 would be better. [The standard emergency fund equals at least three months of necessary living expenses, excluding splurges like vacations or restaurant meals with friends.]

Schultz feels strongly about the emergency fund, especially if buying property is the goal. When something goes wrong – a car accident, a job loss, a house fire – renters “can always move in with mom and dad or a friend, but when you’ve got a mortgage, it’s not easy to get out of,” she said.  Schultz also is not wild about real estate as an investment, since property values aren’t rising appreciably in many areas.

After the emergency fund is established, it’s wise to knock down the student debt first by paying off the loans with the highest interest rates, she said.  Many graduates have multiple loans, so don’t sweat the loans with interest rates at, say, 2 percent – that’s effectively “free money” when inflation is running at 2 percent.

Schultz provided a second option that leaves more wiggle room for individual preferences like buying a house or condo. But she said this would apply only to those with student loan payments under 10 percent of their gross income. These young adult workers can run on three tracks simultaneously: build up an emergency fund, make the monthly payments on student loans, and save for a down payment.

Where does individual choice come in?  When there is a windfall – income from a part-time job, consulting gig, tutoring, tax return, or large birthday check from grandma – devote the extra money to the top priority, whether knocking off the loans or saving for the down payment.

A final piece of advice for young adults trying to build some financial security:  “When you get a raise, people tend to think, ‘Whoopee I can live better.’  But what they need to think is, ‘Whoopee, I can meet my [savings] goals faster,’ ’’ Schultz said.

Mark Zoril, a financial planner near Minneapolis, explores an individual’s personality, stability, and resourcefulness before giving advice.  “When it comes down to these kinds of decisions,” he said, “so much of it is psychological and less financial.”

But buying property is, for a 20-something, “potentially a regrettable decision,” Zoril said.

Even if a bank does approve a mortgage for a student-loan-burdened young adult, he said, the mortgage would only pile on more debt – and more rigid financial obligations. This can be risky for young adults who aren’t yet firmly planted in the labor force and are susceptible to unanticipated employment problems that can jeopardize their ability to pay the mortgage every month.

For these reasons, Zoril agrees that an emergency fund is the top priority. “It’s far more important when you buy a house than when you’re renting,” he said.

Some young adults with student loans are in a better position than others to buy property, however.  If they have secure employment, are not struggling to pay their loans, are already saving for retirement, and have an emergency fund, “The argument for buying the condo is coming out stronger,” he said.

Financial advice is a bit like therapy: each individual should do what’s comfortable for them.

“The important thing you need to do,” Zoril advised, “is save money. I don’t care where you save it.”