Should You Save for a Down Payment or Pay Off Student Loans?

Reasons to Pay Off Student Loans First

Some situations may call for focusing on your student loan payments. If any of the following apply to you, prioritizing loan payment may be important.

You Have High-Interest Student Loans

The interest rate on federal student loans is currently 5.50% for undergraduate students and 7.05% for graduate and professional students. While federal loans are provided by the U.S. government, private loans are offered by financial institutions. Interest rates generally range anywhere from 4% to 15%, according to the Education Data Initiative.

Depending on your interest rate and how much you owe, it might make more sense to put your money toward paying your student debt before saving for a house. Let's say you owe $15,000 and have a 10% interest rate. Accelerating your payments could help you get debt-free faster—and save you thousands in interest.

Your Student Loan Payment Is Significant

The average student loan payment is $203, according to Experian data, but yours may be higher. That could take a big bite out of your monthly income. As you move through the homebuying process, you'll also have to cover closing costs, moving expenses and your new mortgage payment. A large student loan payment could stretch your budget and make it harder to afford these expenses. One guideline is to keep your housing costs at or below 28% of your gross monthly income.

Your Debt-to-Income Ratio Is High

Your debt-to-income ratio, or DTI, represents how much of your gross monthly income is going toward debt payments. Most mortgage lenders require your DTI to be below 43%, but some may prefer one that's under 36%. You can calculate yours by adding up your total monthly debt payments, including rent, then dividing that number by your pretax monthly income. If your student loans are pushing your debt payments higher than you'd like, you'll want to reduce your DTI before applying for a mortgage. You might do that by paying off your student loans faster or increasing your income—or both.

Reasons to Buy a House First

In some cases, putting money toward a down payment on a home may be a good choice. That doesn't mean you'll stop repaying your student loan, but rather continue making the minimum monthly payment instead of trying to pay it down faster.

Your Student Loan Rates Are Reasonable

If your interest rates aren't too high, there may be no need to bump up your student loan payments—especially if you've got credit cards or other debts that are costing you more.

By choosing to prioritize your student loans, you could miss out on the opportunity to build home equity. Every mortgage payment you make increases your ownership stake. Buying a home could help grow your wealth if you eventually sell it for more than you paid.

You're Financially Ready to Buy a Home

Mortgage lenders look at more than just your student loan debt. They'll also zero in on your:

• Other debt: That includes credit cards, personal loans, car loans and other debt listed on your credit report.
• Credit score: Conventional mortgages typically require a credit score of 620 or higher. If you opt for a government-backed home loan, you might get approved with a credit score of 580 or lower.
• Income and employment history: Lenders want to know that you can easily cover a new mortgage payment. You can expect them to look at your employment history and income sources.

If these things are solid, it might make sense to put more money toward your down payment than your student loans. To be clear, you'll still continue making your regular loan payments—you'll just use extra money to pad your down payment fund.

Buying a Home Is a Meaningful Financial Goal

Our financial goals are often linked to our values and personal aspirations. Buying a home might be an important goal for a number of reasons. Perhaps you're eager to put roots down and grow your family, or you want to start building more wealth by investing in real estate. These things may light a fire under you to buy a home. If that's the case, you might not mind paying the minimum on your student loans while you save for a down payment.

Tips for Saving for a Down Payment While Paying Off Student Loans

• Make room in your budget for both. That might mean paying a little more than the minimum on your student loans while also contributing to your down payment fund. You can also divide cash windfalls like tax refunds and work bonuses between both goals.
• Automate your student loan payments. Most lenders offer a 0.25% interest rate reduction to borrowers who sign up for autopay. You'll also be less likely to miss a payment.
• Prioritize other high-interest debt. You might have other debt that's making it difficult to achieve your financial goals. High-interest credit card debt or personal loans should be a top priority.
• Look for first-time homebuyer programs. Many states and nonprofit organizations offer first-time homebuyer loans and grants. They can provide down payment assistance and help with covering closing costs.
• Restructure your student loan payments. Refinancing your student loans or enrolling in an income-driven repayment plan could reduce your monthly payment and make it easier to save for a home. Know your student loan repayment options to help you decide which plan is best for you.

The Bottom Line

If you're asking yourself whether you should pay off student loans or save for a house, the answer depends on your personal financial situation. You might be better off prioritizing student debt if your interest rates, monthly payment or DTI are on the higher side. But saving for a home down payment could be the better option if your student loans are manageable and you're financially ready to be a homeowner.

Wherever you are on the homebuying and student debt payoff journey, Experian has free resources to help you manage your credit. That includes the ability to check your credit score and credit report for free at any time.