What Do You Think About College Debt Loan Relief

Q: My wife and I are 25 years old and we are putting $4000 per year into an IRA for retirement. Our combined annual income is $30,000. I am in graduate school and will be finished in about four years. In addition to the 4000 in the IRA we are going to be able to save an additional 8000 per year. With this 8000 we hope to accomplish the following goals after graduation: Goal 1: Maximize the amount of money available for a down payment on a house Goal 2: Immediately after graduating payoff my entire student loan which is about 22,000. (Some may disagree with this but it seems I often read "get rid of debt, then start saving or whatever") Question: Should we split the 8000 evenly for both goals and put it in two separate funds with differnt goals/strategies? What type of investment strategy would be best for each of the goals? stocks, bonds, MF ??? Personally I think the nature of the goals dictates the amount of risk we are able to assume. For example paying off the college debt is not as important (or some may say not even wise) as is buying a house. Thus, my feeling is we can invest in something with a little more risk for the college loan repayment--and if we take a loss it won't put us in a finacial bind because then we can make minimum loan payments. What do you think?

A: Why? I am not trying to argue you out of this, but you should really think about why buying a house is so important. In the past, real estate has been a terrific investment, but it has been much less so lately. If your reasons for buying are investment/shelter, you might look at renting shelter and investing in other areas. Personally, I bought a house early in life, and have aggresively made extra payments so that we now almost have our house paid off. It probably isn't a rational thing to do with our money if our goal was to maximize our investment returns, but my wife and I felt it was the right thing for US. This is a lot murkier than just paying off all debt. It depends on the cost of debt, what you can LIKELY make on your investments, and what your attitude is about carrying this debt. The old saw about ALWAYS paying off your debt is really only applicable to Credit Card or Consumer debt, which carries such high rates of interest that you will be lucky if your investment returns exceed the cost of carrying it in two of the next ten years. Let's see. If you split it evenly, you might have $20,000 - 25,000 in each account

after 4 years if you take moderate risks and everything goes pretty well. Is that enough to fund your goals? If not, you need to either increase the risk, or fund one of the accounts more heavily than the other. See above about risk. If you can't buy a house in 4 years because your investments went south, but would likely be able to sometime in the next 8, is that a problem? Only you (and your wife) can answer that question. If buying a house is more important, make sure you fund that account adequatedly and invest it with low enough risk that you are certain of meeting your goals. Then invest what is left in another account for your "uncertainty cushion" and debt repayment. .