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Today, I received the news that my "Payback phase" for my student loan has begun. I was afraid this day would come soon, but it came quicker than I anticipated. However, I got the news that I don't have to pay back yet. I have 2 years until my mandatory payments start, but if I wanted to, I could pay off the loan already. They informed me, however, that the interest rate from now on is already set at 0.46%.

I have 420 months (± 35 years) to pay back my student loans, and every 5 years, the new interest rate will be decided and fixed for the next 5 years repeatedly until the last payment. It could go to 0%, or it could go to 10%. I simply do not know.

Some more context on why I am bringing this up in the first place: My girlfriend and I would like to buy our first house. The housing market right now is really tough, but we do have a chance. However, that chance is extremely restricted due to my student loans. Let's say we could get a mortgage of $250,000, and I inform them that I have a student loan. That mortgage would be lowered by twice the amount of my student loan. So, if my loan is $10,000, then my mortgage would be lowered by 2 * $10,000 = $20,000.

The big problem is that my student loan is $32,288.02, and there is no single way we could buy a "livable" house here for ±$186,000. But we can't live in this crappy apartment for years, and we would like to move on at some point too. At this moment, I have around $6,000 in savings, so that is a start.

I am now trying to figure out the best way to handle this situation. I have a couple of options:

Save extremely hard for the next ±2-3 years (around $600-800 a month) and try to get the entire amount to pay it back in one go. Do nothing and wait until the mandatory payment starts, which will be set at around $90 a month, and pay that for the upcoming 420 months. (Basically, pay it back until I am 59 years old.) Something else?

I really need some advice here to see the best way to go around this. What should I do?

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    It would help to include what country you're in since a lot of the advice will be specific to how mortgage underwriting is done in your country. The fact that you're paying back student loans and the 2 * student loans comments make me believe you're probably not in the US. Commented Mar 13, 2023 at 21:06
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    Why save up for a lump sum payment 2-3 years from now instead of making monthly $600 payments? (It can be veeeery tempting to spend $14,000 on something you have convinced yourself that you “need”.)
    – RonJohn
    Commented Mar 14, 2023 at 0:57
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    These kind of student loans - the same system prevails in the UK - are actually a form of disguised tax. Because it's politically easier to do this way than say "everyone born after about 1990 has to pay 1% more income tax". You're not "supposed" to pay them off, you're supposed to pay as little as possible, and if you can hit 35 years without paying it off they will forgive it! duo.nl/particulier/repaying-your-student-loan/… DO NOT PAY OFF THIS LOAN EARLY
    – pjc50
    Commented Mar 14, 2023 at 16:57
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    In the US banks make mortgage loans and as far as I know, they don't care about the total balance of the loans, they only care about your monthly payment and its effect on your debt-to-income ratio.
    – stannius
    Commented Mar 14, 2023 at 19:50
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    "But we can't live in this crappy apartment for years" - Yes, you can. I understand you don't want to, and if you can afford and choose not to, great. But living in a cheap/crappy apartment for years after graduating while paying off debts and building savings is a perfectly viable strategy.
    – marcelm
    Commented Mar 15, 2023 at 14:54

5 Answers 5

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That mortgage would be lowered by twice the amount of my student loan.

doesn't sound too bad, since the other place you can put the money is into "down payment" and that has between 1:1.5 to 1:4 ratio with mortgage (for 40% and 20% down payment, respectively).

Trying to pay off your student loans aggressively will mean you have no down payment, which hurts your mortgage application a whole lot more.

0.46%, if that is per year, is a very favorable interest rate. You would lose both money and opportunity by paying it down ahead of schedule.


The question you didn't ask, related your situation, is whether buying a house together with your girlfriend is a good idea. The rule of thumb is that that sort of financial entanglement should only be entered into by spouses. Without the commitment of marriage co-ownership is a recipe for trouble.

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    Sound advice of not paying the student loan down ahead due to the favourable interest rate and loss of oportunity in regards to mortage. One might add though that even co-ownership when married leads to a lot of trouble, especially when looking at the divorce rates.. ;)
    – iLuvLogix
    Commented Mar 14, 2023 at 12:31
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    Buying a house/flat without being married is extremely common in Europe and plenty of ways exist to handle co-ownership in a proper contractual arrangement. Commented Mar 14, 2023 at 16:29
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    Don't forget, a larger down payment reduces your debt-to-value ratio which makes lending you money much less risky. This can lead to a cascade of things in your favor, like lower costs of borrowing and an easier time finding a lender. These net effects are hard to quantify but in the long run may very well cancel out the drawback of a lower total mortgage amount.
    – bta
    Commented Mar 14, 2023 at 19:16
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    @RonJohn: I guess you missed my point. The difference is not extra student loan payments "now" vs "later", rather it is extra funds paid to house purchase vs to student loan. Time value has nothing to do with it.
    – Ben Voigt
    Commented Mar 14, 2023 at 21:16
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    Your last comment doesn't really hold in the modern world. A significant number of younger people don't like marriage as an institution. I, for one, have a long term partner that I've been with for years and intend on spending the rest of my life with... We are, however, never going to get married because it's fundamentally weird to say "I love you so much lets get the government and/or church involved so you can't leave" Commented Mar 15, 2023 at 18:45
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Anytime you can borrow money for less than 1% APR interest, the perfect time to pay that off is "upon your death". You will never be able to borrow money more cheaply in your whole life.

Therefore the only question is "what about these every-five-year APR adjustments?" What is the basis for their adjustment? That should be in your loan paperwork. If <1% is a "teaser rate" that could snap up to 28%, then I'd be thinking about paying that off. But if it's likely to snap up to 3% or 4%, that's still the cheapest money you'll ever borrow. Paying it off early makes no sense, except for "feel-good" emotions - and emotions are notoriously bad at making financial decisions. An educated person shouldn't have that problem, unless colleges are giving diplomas to people with no financial education.

and pay that for the upcoming 420 months. (Basically, pay it back until I am 59 years old.)

I get where that seems intimidating and frustrating and like a "life sentence", but this is emotional reasoning. From a fiscal POV, being at such low interest rates makes it the bargain of the century.

And the idea of taking til age 59 to pay it off is nonsense. You can pay off the loan at any rate you want. However, if you do, you'll never be able to re-borrow at that kind of interest rate ever again.

Still not getting it? OK. Long-term, the stock market pays 5-7% over and above inflation. There's short-term volatility (what people call 'risk'), but on average, it grows solidly. For every 20% crash there's a 30% gain the next year or three. This is gold-standard, and is the basis for how university endowments manage themselves. So any potential loan payment beyond minimum could be put in index funds instead, where in the long term it would grow faster than the loan does.

I completely agree with Ben that having the cash banked for a home down-payment will be much more helpful toward your home ownership goal than having the student loan paid down.

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    paying off a loan can also make sense to get rid of the bureaucracy associated with the loan Commented Mar 14, 2023 at 3:47
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    @user253751 It's not just the time spent managing the loan. It's also the time spent managing whatever other investments the money is in! Like the goblin says, "time is money, friend". Commented Mar 14, 2023 at 4:33
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    and you get forgiven any outstanding balance at the end of the period! duo.nl/particulier/repaying-your-student-loan/…
    – pjc50
    Commented Mar 14, 2023 at 16:58
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    I'm not sure where the assumption comes from that university diploma implies financial education, but "colleges giving diplomas to people with no financial education" has been my experience in the US at least.
    – scohe001
    Commented Mar 14, 2023 at 18:26
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    "teaser rate" - No, this is a government loan. The reason it's so low is because it's just the Dutch treasury rate. It's literally AAA-rated. It will go up alongside the Dutch treasury rate, since the ECB is raising Euro interest rates to combat inflation. But this rate will remain extremely low, almost certainly even below inflation.
    – MSalters
    Commented Mar 15, 2023 at 13:56
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OP is using the wrong (outdated) calculation.

The "twice study loan" rule of thumb was based on the old study loans which have to be repaid in 15 years. Since the duration has more than doubled, the factor has decreased from 2x to 0.7x (approximately). Even if repaying would help (which it doesn't), your maximum mortgage would only increase by 70% of what you repaid. Even ignoring interest, that's just a plain bad deal.

Source.

Also note that under Dutch rules, partial repayment isn't credited. The repayment is assumed to shorten the duration of the study load, but OP will be constrained by their current income.

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Look up Mortgage Rates

It seems likely to me that your current loan rate is well below the current mortgage rate. In the US, a mortgage at 3% was considered historic lows, and in early 2023 Americans with excellent credit are looking at 6.75% mortgages.

Your country may be different, but in the US, with a student loan at 0.5% APR, you'd do much better in the long term to save up for a larger down-payment - you'd be paying much less interest over the long run.

Variable Rates

The variable rate is the tough part. As long as the rate is low, paying off the student loan slowly is fine. But you don't know how the rate will change over time, which is difficult.

Potentially, you could save hard for the next 5 years, then make a decision when the first rate change happen. Pay off the student loan if the rates escalated significantly, or use the money as a down payment if they did not.

Short Term Pain

I don't know that I see a clear path to home-ownership in the next 3-4 years. From Googling, it looks like the transaction costs in the Netherlands for buying a home are about 5% of the value, but down payments aren't required. So for a 250k home, you'd need about 45,000 to pay off the student loans and cover closing costs. At $800 a month, that's over 4 years (even if you use all your 6k in savings, which I wouldn't recommend.)

If your current situation is not tenable for the next 4-5 years, I might look for a different apartment (further out of the city but larger, perhaps.) Save hard for the next 5 years, making the minimum payments, and then make a call when the rate change happens about what is best for you.

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    Transaction costs include 2% tax, but this is waived for first-time home buyers like OP.
    – MSalters
    Commented Mar 15, 2023 at 13:46
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    Also, while it's true that you won't know how the rate will change (it's the Dutch treasury rate), you're still getting a rate for AAA-rated debtors.
    – MSalters
    Commented Mar 15, 2023 at 14:02
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The best time to pay off a loan is ALWAYS NOW, UNLESS there are penalties for paying off the loan.

Call me old fashioned, but living debt free is the best way to live.

That new car and television can wait, save up for them while you can. Don't buy yourself deeper in debt by paying off one loan (your mortgage) with money you should have used to pay off your student loans.

That rental apartment might be small, but it's cheap. When you buy that house, you're also going to have to take into account maintenance cost, higher property taxes, you have to pay for renovations and repairs yourself. Is it worth it? Hell yes. When you have the income and savings for it. If you have to borrow yourself deeper into debt, HECK NO. And if the only way you can afford to buy that house now is by not paying off your student loans, you're not going to have the money to pay for the upkeep of your house. Wait until you get a better paying job first, and save up some money, THEN buy a house.

I lived in a small rental apartment for 10 years after I graduated before I bought the house I live in now, I never regretted it. And if the rent of that place hadn't got higher and higher until it topped the mortgage payments I'm now making, I'd not have moved for another few years (and would have paid less for my house as I ended up buying just before the mortgage crash of 2007/8).

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