There’s a lot of student debt out there — about $1.56 trillion of it, as of February 2020. The average student debt burden is just over $37,000, and a recent study found that nearly half of college students are taking on significantly more debt because of the pandemic. Paying those loans down can put a serious dent in your budget, especially early on in your career, when you’re still making an entry-level salary.

While paying off student loans is one yet another responsibility, you shouldn’t let it keep you from laying down a solid financial foundation for yourself. Although the numbers show that paying off student debt can force you to delay homeownership, you can still plan to buy your first home.

Finding the perfect home, whether through Zillow or Redfin, and cultivating a credit rating that will appeal to lenders are both very important, but everything really starts with saving for basic home buying expenses like closing costs, home improvements, moving expenses, and your down payment.

Down Payment Options

Each loan program has different requirements for the amount of money you’ll need to cover a down payment. There are even quite a few options that waive the need for a down payment, including:

• VA loans (for active-duty military, veterans, or surviving spouses)
• USDA loans
• Some down payment assistance programs offer zero down options

If you’re not military or you don’t fit into one of the zero niche programs mentioned above – you’re not alone, most use a 3-5% down FHA or conventional loan option.

If you’re an aggressive saver, a 20% down payment will get you ahead of the game by whittling your payments down, getting you more favorable loan terms, and taking a big chunk out of that sale price on the front end.

So, how do you save for common home-buying expenses while also paying off your student loans? It’s not easy — but it’s not that difficult, either, if you follow a few simple rules. Here are some basic principles to jumpstart your savings and put you on the path to homeownership.

Start a Dedicated Savings Account

Money is money, right? It may not seem like it matters where you put it, as long as you’re saving it. But accessibility is a big factor in how much you save and how effectively you’re able to keep your hands off it. Money that’s sitting in your checking account is a lot easier to spend than the money that’s partitioned in a separate account.

Experts suggest starting a separate, dedicated savings account for your down payment. Don’t give yourself debit card access to this account; make it as difficult as possible to withdraw the money.

You might also want to consider keeping your down payment funds in a money market account or a high-yield savings account; these accounts offer higher interest rates than a standard savings account. Another great option, especially considering the accessibility issue, is a certificate of deposit, or CD. These offer higher yields than savings accounts but very little liquidity, meaning your money is essentially locked away for the term of the CD. If you’re worried about your self-discipline, this is a great option.

Reconsolidate/Refinance Your Loans

Refinancing or consolidating your loans can dramatically lower your monthly payments or your interest rate. This will save you thousands of dollars in the long run, and lighten the financial load in the short-term, freeing up more cash that can go into your down payment savings account.

Just be careful to get the best deal possible. If you’re consolidating, make sure you only consolidate the loans that will gain a better interest rate. For example, if you have three loans, one at 6.8%, one at 7%, and one at 3.5%, and you have a consolidation offer that will combine the loans at a 4% interest rate, don’t throw the 3.5% loan in there just for convenience.

In addition, keep in mind that if you consolidate your federal loans, they’ll be converted to private loans. That means you’ll lose the protections that come with federal student loans, such as potential forgiveness after a certain number of years and income-based repayment.

Reduce Unnecessary Spending

When you make a budget, start by adding up your most important costs — rent, food, utilities. Then deduct your student loan payments and any other debt you’re prioritizing. What’s left is your discretionary spending, and you should try and save as much of that as possible.

Small Adjustments

That means you have to look at your remaining expenses with an eye toward reducing them as much as possible. If you buy a coffee on the way to work every morning, that can add up fast — a $6 latte every workday is $120 a month and $1,440 a year. Making coffee at home costs you a fraction of that.

Apply this logic to the rest of your costs. If you have a deluxe cable package, could you get by with just one or two standalone services such as Netflix or HBO Max instead? If you eat at restaurants or order takeout several times a week, could you cut that in half — or eliminate it entirely? Many people spend the most discretionary income on food, but cooking at home is not only healthier, it’s also much cheaper.

Large Adjustments

Depending on how motivated you are to buy a home, you could even consider measures such as giving up your car and taking public transportation and the occasional Uber. Giving up your car gets you out of parking, gas, insurance, repairs, and a bunch of other potential costs and living car-free can be pretty easy if you live in a dense city.

Once you’re looking at big expenses like this, you should also consider how much rent you can afford and how you can bring that number down. Proximity to your job and amenities can be nice, but moving to a slightly less convenient location can seriously turbocharge your savings.

If you’re having trouble finding places to trim your budget, a good first step might be to keep a spending diary. Simply record every dollar you spend for a month, and then review your entries and split your costs into categories. Most people will discover a few expensive surprises.

And when you are close to starting the home-buying process, keep in mind you can use cost-saving measures such as working with a discount broker such as Houwzer and Redefy.

Look for Alternative Sources of Money

If you have money in retirement accounts, you can probably use some of it to buy a home. Many 401(k) and 403(b) plans let participants withdraw money from the account to buy a home, and IRA accounts allow withdrawals for first-time homebuyers.

But we should be clear: These are loans that you’re taking out from your retirement accounts. That means they have to be paid back at some point, or you could be subject to serious penalties. For example, you may have to pay income taxes on the money you withdrew and maybe even the 10% early withdrawal penalty.

Make a Plan — and Stick to It

Saving money while paying off student debt can feel like being pulled in two different directions. But once you make a budget and a plan, promise yourself that you’re going to stick to it. It will be hard at first, so take it a little at a time. Start with a week of cooking at home and not buying lattes; if you make it through that week, try two weeks. Then work up to a month.

And if you slip up and go out for an expensive restaurant dinner (or three), shake it off, chalk it up as a learning experience, and get back to your savings plan. Just remember: Your goal isn’t to take the joy out of your present-day life, even if it may feel like that sometimes; it’s to set yourself up for the future.

If you have questions about saving for a home while paying off student loans, OVM is always here to help. Contact OVM Financial to learn more.