Email question: Should lump sum of money go toward debt or down payment?

Pete,

I hope that it's not in poor form to solicit financial advice via email from a stranger, but I've been faced with an interesting financial predicament recently and am unsure of what to do.

A few weeks ago, I received a $20,000 life insurance payout. At the same time, I moved into an apartment with my wife as we just got married. We're paying $1,000 a month for a small one bedroom apartment outside of Denver, which is a good price for the area. We would love to use the money as a downpayment on a house to get more space for a lower monthly rate.

On the other hand, I'm in a mountain of student loan debt that's about 4 times the amount of the life insurance payout.

I'm in the process of applying for loan consolidation, but have quite a few loans at different rates, totalling $81,945 with a current monthly payment of about $850

Private loans:

$23,367 at 7.25%

$16,806 at 7.75%

$10,156 at 7%

$11,346 at 9.62%

$4,367 at 10.75%

Federal loans:

$3,338 at 5.8%

$3,450 at 4.5%

$4,982 at 4.5%

$4219 at 6.8%

Obviously, it was a huge mistake to take so much out for school. I was nowhere near prepared to make such a giant decision at 18. Luckily, my wife is debt free.

We would love to buy a house and use the monthly rent savings to pay down the student loans quicker but I'm just not sure if that's the best route. Housing prices seem to be a little higher in Colorado than I remember in Indiana, we're looking at houses under $200,000 and plan on contributing 25-30k as a down payment if we were to use the life insurance money.

It's easy to think of the life insurance money as a down payment but is it wiser to use it all on loans while still renting?

Any advice you may have would be a huge help.

Evan

(Pete's note: Since receiving this email, I've also talked to Evan on the phone during an Open Phones session. If my answer reeks of knowing more about his situation than his email presents, it's because it does.)

Thanks for your email, Evan. And no, it's not poor form to solicit advice via email. Not giving a courtesy wave after being waved through at a four-way stop is poor form. And it should be punishable by death. Death. There's a lot going on here with this email. You finally get to the heart of the question, near the end. You are itching to buy a house. And you are thinking about using the life insurance money as a down payment, under the guise of lowering your monthly housing expenses, which in turn would lead to you paying down your debt. You emailed with a problem. The problem is two-fold. You have a mess of student loans, and you want to reduce your housing expenses. You are attempting to solve these two problems by becoming a homeowner.

Evan, have you and your wife ever known a couple that fought all the time. And you and your wife would constantly comment to each other "they should just break-up. They argue too much." But instead of breaking-up, the couple decides to solve their relationship problems by getting married. This happens all the time, and it doesn't make sense. In my opinion, they're trying to solve a problem, by creating a potentially bigger problem. You're doing the same thing with the home purchase plan.

I don't think you should buy a house with this money, as you hinted that moving out of Colorado, might be in the cards. I also don't think you should necessarily wipe-out your student loan debt with the life insurance money. You can free-up as much cash flow as possible by completely wiping-out entire individual student loan debts, and then use this cash flow to to pay off the other debts. But I wouldn't leave yourself without an emergency fund. Additionally, I wouldn't save another dime. Well, keep saving for retirement, but don't save another dime toward non-retirement savings/investments. Use your positive cash flow to pay down the student loan debts. You don't need to buy a house to start focusing on student loan repayment.

One last thing. Always give a courtesy wave when waved through at a stop sign.