I recently have been considering buying a beachfront condo. One of the hardest parts of making a decision is the financial impact of buying a condo. As you know, my girlfriend has been paying off her student loans and I’ve been saving to help her pay them off once we get married.
Instead of just wondering what impact it would have on my finances I decided to run the numbers and see what would actually happen. Below are a few scenarios of how long it’d take to pay off my girlfriend’s student loans and how much interest we’d pay in each case.
Option 1 – Minimum Payments Only
This isn’t really an option we’ve ever considered but it is worth exploring. If we make just the minimum payments we’ll be paying for my girlfriend’s student loans until 2024! CRAZY!
While making payments over a long period of time isn’t a fun idea, the more important number to us is total interest paid on the loans. By paying only the minimum payments we’ll pay just over $22,000 in interest. No fun.
Option 2 – Continue Paying at the Current Rate
This option isn’t very likely either, but again is worth exploring. If we never combine finances and my girlfriend continues to pay her student loans off at her current rate (without my contributing) she’ll have her student loans paid off in early 2019. That’s better than 2024… but not by much.
What’s amazing about this option is that, while it only shave 5 years off the loan time period, this option will reduce total interest paid to just under $11,000. That’s half of the interest paid in option 1 above.
Option 3 – Don’t Buy a Condo
This is the first realistic option. I would use my cash hoard in the way I originally intended and pay down my girlfriend’s student loans once we get married if we don’t buy a condo. This method would result in my girlfriend’s student loans being paid off by the end of 2013!
Even though the time period is drastically reduced by this option we’ll still end up paying a decent amount of interest. This method would result in a little less than $3,000 dollars of interest paid. That’s only 1/4th of the interest in option 2 and 1/7th of the interest paid in option 1.
Option 4 – Buy the Condo
This is another realistic option. In this option my cash hoard would be used for a down payment on a condo instead of being used to pay down my girlfriend’s student loans.
After we buy the condo we have planned for a three month transition period to rent out the townhouse we currently live in. During this time we’d have two mortgages and less extra money to put toward her student loans.
Once the townhouse is rented we’ll then transition to our new budget and resume the student loan payoff at full speed. This is probably an overly cautious transition plan but we wanted to plan for the worst.
In this option my girlfriend’s student loans will be paid off in late 2015 to early 2016. This option extends the payment for about 2 more years than our current plan, option 3.
This option also means paying more in interest. We’d end up paying a little less than $6,000 in interest in this method, or about $3,000 more than in the current plan.
Student Loan Interest Isn’t the Only Thing to Consider
The student loan interest analysis is only half of the picture. In order to make a smart financial decision you need to look at the whole picture and look at the total financial impact. The other half of the picture is the condo prices and interest rates.
If either of the prices or interest rates change between buying now and buying after her student loans are paid off (and saving up a down payment) it would alter the financial results. If the price goes up or interest expense on a mortgage rises by more than $3,000 in the time period we delay a condo purchase it wouldn’t be financially wise for us to put off buying the condo.
I’ll be delving into this half of the equation in another post.
So, based just the student loan interest side of the equation, which option do you think will work out best?