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Balancing a First Time Home Purchase with a Mountain of Students Loans

| September 12, 2018
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Today's graduating resident or fellow faces a daunting challenge of managing an average of $157,944 in student loan debt according to the College Board, with saving for a down payment on a home. In today's lending world a minimum 20% of the purchase price is often required. Recent graduates are often saddled with high-interest loans typically in the high 6% range. Prioritizing whether to save for a down payment or aggressively pay down the student loan debt is one of the most common questions I am approached with. While common sense would dictate that you would want to retire high-interest loans before saving for a house, most young physicians do not want to wait until their fifties to make a home purchase. The compromise is to make the minimum payments on the student loans, while saving for a down payment of 20%. Once the down payment fund is achieved, then the strategy switches to repaying student loans more aggressively. Although you would accrue more interest in the short-term, the opportunity to enter the housing market at today's home prices, coupled with near record-lows in housing interest rates, could make sense in the bigger picture. Once you have moved into your new home, the after-tax cost of student loans is typically much higher than your mortgage due to most physicians not being allowed to deduct student loan interest due to income caps, which is currently $75,000 for a single filer and $150,000 if married filing jointly. Mortgage interest does not have an income cap reducing deductibility.

Some large medical institutions offer home buyers assistance programs. Assistance with a down payment typically is 10% or $100,000, whichever is lower. The loans are often at 0% or at very low rates and require repayment over a period of approximately ten years. These programs typically require continued employment as a condition to maintaining the loan. Since there is often no interest accruing on the loan, an effective strategy is to create an automatic deposit into a separate account invested very conservatively with the sole intent to repay the loan at its due date.

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