Student Loan Debt vs Mortgage Debt - Which is better?
There are advantages and disadvantages to both regular and student loans.
The biggest advantage of student loans is that payment can be deferred. In other words, they can be set up in such a way that the loan does not need to be repaid until after the student stops attending school. Since most college students do not possess the funds required making this size of payment while in school, this is often the only way they feel they can make payments. However, this comes back later, when the payments are much higher after graduation, due to the additional principal.
Student loan interest rates vary according to how the institution calculates the rate. The United States government loans have a set interest rate and cap. Other institutions calculate rates depending on the student credit rating combined with the parent's, the student's GPA, financial situation, and similar factors. Like with mortgages, the rate varies depending on the type of loan—interest-only, options, and whether the interest is adjustable or set. Rates are invariably higher than mortgages, particularly if the payment is deferred. A parent with good credit cosigning a student loan will typically lower the interest significantly, although not to the level that the parent alone might get.
A higher interest rate means that in the end, most student loans result in a higher total payment than a mortgage. Additionally, if payment is deferred, the interest accrued during the interim is added to the principal. This means that future payments are increased due to the higher level of principal on which the interest is paid. This is further increased by the fact that deferred payment student loans are riskier for banks than non-deferred loans—due to the possibility of the student dropping out of school—so the interest rates are already higher than a standard student loan.
One way to hit a middle line between the two types is a mortgage with an interest-only option. This means that the debtor has the option of paying only the interest while leaving the principal untouched. While this does leave the existing principal, meaning that the interest payment will not decrease, but it lowers the payment for students who cannot make massive full mortgage payments. Interest in these cases is still typically higher than normal mortgages, but not as high as an un-cosigned student loan. More importantly, because the interest is paid down each month, it is not added to the principal. This, in turn, means that the subsequent interest will only be paid on the prior unpaid principal—not principal plus previous interest, as with a deferred payment student loan.