Question: I have a dilemma that I hope you can offer some advice on: I am currently in the process of paying off some hefty student loans I accumulated while earning my bachelor’s and master’s degrees. I pay almost twice the required payment. (Please let me know if you need specific figures.) My husband and I would like to save for the down payment on a home to be purchased within 5 years. Would it be more advantageous for me to continue aggressively paying down the loans (fixed interest rate of 4.25 percent) or save as much as possible to apply to a home to be purchased in the near future? Michelle, Indianapolis, IN
Answer: I want to make one point before getting to the heart of your question. When you make your extra monthly payments, I hope you’re directing the additional money toward reducing the principal on the loan. This way, you will cut the amount of interest you’ll pay over the life of the loan. You can make sure the extra money goes toward principal by including a written request to your lender to apply the extra payment toward principal.
Now, to your question: There are a number of ways to think about this. Being debt free is terrific. A place to call your own can boost your everyday quality of life.
One way to decide the best financial course is to look at how much you have put into your emergency savings/opportunity fund. Let’s say you have a flush account that can be tapped to meet unexpected expenses. I would then back off slightly on the extra payment to the student loans and put a little every month into the emergency fund.
However, if the emergency fund is lean, I would ease up on the student loan payments for now and get aggressive about your overall savings.
It’s good to have a savings goal. It’s easier to set money aside if we know why we’re doing it. Five years is a long time and a lot can change. The advantage of this strategy is that you can decide in a few years to take a chunk of money and get rid of a lot your student loans. Or, if it’s the right move, buy a home instead. Or, perhaps, embark on an adventure. Your choice.
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