Welcome back to another Reader Case Study! It’s been a while since we tackled one of these, and I almost forgot how much I enjoy them. Why the hiatus, you ask? Well, a minor technical hiccup meant my MMM contact email wasn’t forwarding messages for weeks. I assumed the questions had simply stopped. Turns out, I was wrong—very wrong. After fixing the issue, my inbox was flooded with over 100 emails. Time to roll up my sleeves and get back to work.
Today’s case comes from a U.S. couple balancing student loans, a growing family, and the dream of homeownership.
The Scenario
Here’s the setup from our thoughtful reader:
The Facts:
I’m a recovering law student working as a law clerk while searching for a full-time job. My spouse is a full-time mom who also does contract editing work in the evenings. Our monthly income has hovered around $2,000, which matched our expenses. But recently, we cut costs—thanks to me biking to work, borrowing a bike trailer for errands, and other frugal strategies—allowing us to save $500 a month.
At tax time, we’ll receive about $4,000 in credits (Earned Income + Additional Child Tax Credit).
Here’s where we stand financially:
- Debts: $52,000 in student loans (currently deferred; most aren’t accruing interest, except for one $4,700 loan at 6.8%).
- Assets: $6,000 in cash, $14,000 in retirement accounts, two extra cars (each worth $2,500) we plan to sell, and our primary car (an ‘02 Honda Accord, purchased for $4,000 cash).
The Dilemma:
Should we focus on aggressively paying down student loans or start saving for a house down payment?
MMM Responds
Congratulations on your frugal lifestyle and proactive financial planning! Many people in your shoes might jump straight into buying a house or financing luxury items. You’re wisely questioning the best route forward, which sets you apart.
Here’s my advice: start by tackling the student loan with the highest interest rate. That 6.8% loan is costing you money every day it remains unpaid, and eliminating it will yield a guaranteed return on your cash that no savings account can match. Use a portion of your $6,000 cash reserve to pay it off immediately. Problem solved!
Now, let’s talk about the rest of your loans. For the moment, since they’re in deferment and not accruing interest, you don’t need to prioritize them. Instead, focus on building stability—namely, securing a job and creating a solid financial foundation.
The Housing Question
You mentioned wanting to save for a house down payment. While homeownership can be a smart long-term goal, here’s why it shouldn’t take priority right now:
- Debt trumps savings: If you try to save for a house while carrying debt at 6.8%, it’s like investing in a savings account with a negative return. Paying down high-interest debt is the best use of your resources.
- The real cost of homeownership: Owning a home isn’t just about the down payment. Mortgages come with property taxes, maintenance, and inevitable upgrades. Add those expenses to your existing student loans, and you’d be juggling multiple financial burdens at once.
- Flexibility is your friend: As a law clerk with a job hunt underway, you may need the freedom to relocate. Renting gives you that flexibility without the commitment of a mortgage.
A Step-by-Step Plan
Here’s a practical roadmap:
- Pay off the $4,700 loan immediately. Use part of your $6,000 cash reserve to knock it out.
- Sell your extra cars. You mentioned having two spares worth $2,500 each. That’s $5,000 sitting idle. Sell them and add the proceeds to your emergency fund or use it to chip away at the remaining student loans when they begin accruing interest.
- Stay frugal. Continue saving $500 a month. For now, funnel this money toward your student loans when they come out of deferment.
- Avoid house savings for now. Once the loans are paid off, you’ll have a stronger financial position to start building a house fund.
The Long Game
Imagine this: With your loans gone, your monthly expenses will drop significantly, giving you more room to save for a home without feeling stretched. Plus, you’ll qualify for better mortgage terms with a higher credit score and no lingering debts.
By prioritizing debt repayment, you’re effectively building a solid foundation for future homeownership. When the time comes, you’ll approach it from a position of strength, not financial strain.
Final Thoughts
You’re on the right track, and your thoughtful approach will pay off. By tackling high-interest debt first and living within your means, you’re setting your family up for long-term financial success. Keep up the good work, and good luck on your job hunt—once that income increases, your goals will be even closer within reach.
Case closed! 🕵️♂️