Can I Use My Student Loan to Buy a Home?
Money Girl advises a student about using excess financial aid to buy a home.
Q. I’m a graduate student and will be receiving more in student loans than I need. Can I use my excess student financial aid for a house down payment?
A. When faced with an important decision about how to manage your money, think about it in the context of your entire financial situation. The best way to do that is to review the financial priorities that I outline in How to Make Decisions About Personal Finances.
If you don’t achieve priorities in the right order—such as having an emergency fund before buying a home—you can get into real trouble. While buying a home is a terrific goal for many people and can be fun to think about, it shouldn’t be considered until your finances are in great shape.
In addition to having enough cash for a house down payment, you also need an emergency fund equal to at least 3 to 6 months’ worth of your living expenses. Never use your emergency fund for a down payment. Otherwise you won’t have a financial cushion to fall back on if you lose your job, become unable to work, or have a large unexpected expense.
Additionally, you should be making regular contributions to a retirement account, such as an IRA or a workplace 401(k), in an amount equal to 10% to 15% of your gross income. And of course, you should have little or no high-interest debt, such as credit cards or car loans that charge double-digit annual interest rates.
If you’ve protected yourself by accomplishing what’s most important first by saving for the unexpected (emergency fund), saving for the future (retirement account), and eliminating expensive debt (credit cards), then you can spend your excess student loan money any way you like. If not, you have your next homework assignment!
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