Should You Downsize to Pay Off Student Loan Debt?June 25, 2021
Depending on the type of loans you have, your repayment plan, paying off student loans may take longer than you’d like.
If you have a substantial amount of outstanding student loans, you may be considering downsizing as a faster way to pay off debt. While this can be an effective way to eliminate your loans, it’s not a good idea for everyone.
Downsizing to pay off debt: When does it make sense?
Downsizing involves selling your home and purchasing a smaller, less expensive house to save money. Reducing your housing expenses can helpful in the following scenarios:
1. Your mortgage payment is too expensive
Experts recommend that you spend no more than 28% of your income on housing. If you make $5,000 per month, that means your mortgage payment should be no more than $1,400.
However, many Americans go over that number when purchasing a house, stretching their budget to the max.
If your mortgage payment is too high, downsizing can be a good way to pay off debt and improve your finances. You can buy a smaller home and get a lower payment, giving you more breathing room in your monthly budget.
For example, let’s say you have $30,000 in student loans and own a $400,000 home. With a 30-year mortgage and assuming a 10% down payment, your monthly payment would be about $1,557.
If you downsized and purchased a $275,000 home with a 10% down payment, your monthly mortgage payment would be about $1,071 — giving you $486 more each month to work with in your budget.
2. You have the potential to relocate for better-paying work
If you feel like your career has stagnated and you aren’t able to improve your income in your current position, relocating for another job can be an excellent solution.
Getting a new job can significantly boost your income. Salary increases for new jobs are usually between 10% and 20%; if you make $60,000 per month, you could see your income jump by $500 to $1,000 every month.
If you’re trying to decide if it makes sense to relocate and buy a smaller home than you have now, make sure you consider the new location’s cost of living. Moving to a more expensive area can negate the value of your salary increase. You can use a cost of living calculator to help you make an informed decision.
3. Your home requires a lot of upkeep
Your home’s mortgage is only one of your housing-related expenses. As a homeowner, you’re responsible for a lot of upkeep, and all of that work can be time-consuming — and expensive.
Landscaping, winterizing your plumbing, power washing, and maintaining or replacing septic tanks can all be costly projects.
Housing experts generally say you should set aside 1% of your home’s price each year in a savings account to cover maintenance expenses. If you have a $300,000 home, that means you should save at least $3,000 per year.
However, if you have a large home, or if your house is older, your expenses could be significantly higher. You may have to save 3% or 4% of your home’s value — $9,000 to $12,000 for a $300,000 home — to have enough money for those costs.
If your house is expensive to maintain, downsizing to a newer or smaller home can reduce your maintenance costs — and give you more time to pursue your goals.
When downsizing isn’t a good idea
While downsizing to pay off debt can be helpful for some people, it doesn’t always make sense. You should think twice about downsizing in the following situations:
1. Your mortgage payment is reasonably affordable
Finding another home that meets your family’s needs — and your budget — can be challenging. If your mortgage is within the 28% guideline and you can comfortably afford all of your existing debt payments, it may not be a good idea to downsize. Instead, you can allow your home to continue to build equity.
2. You love your home
Personal finance is not always about numbers; your emotions play a role, too. If you love your home and it’s a good fit for your family, downsizing may not be necessary. There may be other ways to accelerate your debt repayment without selling your home.
3. You live in a hot housing market
If you downsize, you still have to find a home to live in afterward. In hot housing markets, that can be difficult.
For example, the California Association of Realtors reported that the median home price within the state is a staggering $818,260 — 177% higher than the national median home price of $295,300.
If you’ve been in your home for a few years and sell, you may find that a new home is even more expensive since there are so many buyers willing to pay sky-high prices. If waiting to sell your home is the best option for you, consider taking a few months to boost your credit score and lower your debt-to-income ratio for the best chance of a competitive interest rate on your next mortgage.
4 Alternatives to downsizing
If you decide against downsizing, or if you want to try more than one strategy, you can use the following tactics to tackle your loans:
1. Apply for an income-driven repayment plan
If you’re struggling to keep up with your loan payments and have federal student loans, apply for an income-driven repayment (IDR) plan. Based on your discretionary income and an extended loan term, IDR plans can help reduce your monthly payments.
2. Rent out your space
If you have a big home, but don’t want to sell it, consider renting out your extra space. If you have an unused bedroom, you can list it on Airbnb. Or, if you have unused closets or a garage, you can rent out that space to people looking for storage or parking. You can find potential renters on SpotHero, Spacer, Store At My House, and Neighbor.
You can use the rent you receive for your unused space to make extra payments toward your student loans, reducing the interest that accrues.
3. Use a debt payoff strategy
If you have multiple student loans, you can use the debt snowball and debt avalanche methods to tackle your debt. Regardless of which strategy you use, these payoff methods will help you stay focused and pay off your student loan debt faster.
4. Refinance your student loans
If your student loans have high interest rates, student loan refinancing can be a powerful solution. You can refinance and qualify for a lower interest rate, helping you save money and pay off your loans sooner.
You can use ELFI’s student loan refinance calculator to see how refinancing would affect your monthly payments and total repayment costs.* If you decide that refinancing is right for you, use the Find My Rate tool to get a rate quote without impacting your credit score.