You’ve seen news stories lately about how student debt is preventing people from taking the next steps in life. This isn’t one of those stories.
Not that Anthony Yarnall didn’t have student debt. The 26-year-old graduated from the University of Washington with a degree in urban planning and $55,000 of debt.
It wasn’t supposed to be like that.
“I went to the University of Washington on a track scholarship,” says Yarnall. “But two years in, when I became an urban planning major, I was missing too much class time going to meets. I had to quit running.”
That proved to be an expensive decision. Yarnall lost his scholarship and in one year took out $30,000 in loans to pay for out-of-state tuition. “I joined the National Guard to get the in-state tuition rate, but I still graduated owing a lot,” he says.
Yarnall is allergic to debt. He grew up in Santa Clarita, near Los Angeles, and witnessed what happened in 2008 when California was the epicenter of the subprime loan collapse: “In the financial crisis I saw a lot of friends lose their houses and their parents lost their jobs. That was scary.”
“Scared” is also a word Yarnall uses to describe how he felt about his student debt, which carried an interest rate of 7%. His strategy? Get rid of it quickly.
He landed a job as a program analyst with a public transit agency and took a sledgehammer to his loans — paying off at least $2,000 every month. In less than two years, he paid off $55,000 in student loans. How is that possible? Yarnall makes $71,000 a year in his job and brings in an additional $3,000 a year serving in the National Guard — but he doesn’t spend any more than he did as a college student.
“I pay $550 a month to live in a comfortable house in West Seattle and I have five roommates,” Yarnall says. “It can be a little bit trying to live with so many people but mostly I like it.”
Yarnall hopes the next place he lives will be a house he owns. That’s why he reached out to the Money Makeover. Our partner, the Financial Planning Association of Puget Sound, paired him with financial planners Holly Davis and Jonathan Coleman with Arrivity Financial Planning in Seattle.
Davis was immediately impressed with Yarnall’s discipline. “He’s taken the $2,000 a month he was saving toward his school debt and redirected it to a home down payment. He’s kind of an overachiever, saving 44% of his income before taxes. I give Anthony big kudos for that.”
In addition to buying a house, Yarnall also wants to save money for graduate school so he can achieve his ambition of becoming a project manager on a big transit project. Because he has competing financial goals, the planners asked him what’s his top priority.
“He said he wants to buy a home in about three years and his target is a house that costs around $600,000,” Davis says. “He’s anticipating having a family and he wants a single-family home that would allow for growth.”
Here comes the part of the job planners don’t relish. They crunched the numbers and found there’s not a Seattle dream home in Yarnall’s immediate future — more likely a condo in Kent. There are a few reasons for this dose of reality.
By the time he met with the planners, he’d saved $20,000 and hoped it could all be earmarked for his house purchase. Yarnall figured the planners would have an idea where he could put the money so it could earn more than the savings account it’s in now.
“He wanted to supercharge the savings. Especially in light of the market volatility these days, that’s not a good idea for a short-term goal,” says Davis. “Anything other than an FDIC-insured savings account, you are putting those funds at risk.”
A bit more bad news for the house account — the planners calculate that Yarnall needs a $16,000 emergency fund to cover six months of expenses. The cash pad will also allow him to lower the premiums on his car insurance by raising the deductible. That trimmed his house-saving account to $4,000.
With an audible sigh, Yarnall says he’s feeling anxious because house prices in the greater Seattle area are going up and up, and he’s worried that he’s going to miss the boat.
“Anthony was kind of scared about the housing situation,” says Coleman. “The more he puts in the bank, the more houses go up. This dream is harder to reach than it used to be.”
But not impossible. The secret, Davis suggests, is to make a down payment on the dream by jumping into the housing market with a less expensive property.
“A lot of people in Seattle are in the same situation. We recommend that Anthony target a less expensive home and get his foot in the door,” Davis says. “It will appreciate at the same rate as the dream home and Anthony will gain equity in the real estate market.”
Based on what he makes now, the planners say Yarnall could afford a home in the $400,000 range. He’ll want to wait until he has a 20% down payment to avoid paying private mortgage insurance.
“Holly and Jonathan did a fabulous job showing me what I could afford. They also recommended that I get a roommate to help with the costs. I really appreciate that,” Yarnall says.
The big idea here is to prevent Yarnall from becoming house poor, meaning that an overwhelming share of his income is tied up just in paying for the home.
“Anthony should keep his monthly mortgage payment less than $1,700 a month or 28% of his income,” Davis says. “More than that, and he could have trouble covering other expenses and saving for retirement.”
In the three years he’s been working, Yarnall’s been doing a good job getting his retirement funds off the ground. He contributes 10% of his salary into a 401a and his employer puts in 12%. (A 401a is offered by government organizations and nonprofits. Unlike a 401(k), the employer sets the contribution levels for the employee.) At 12%, the match that Yarnall gets from his organization is generous, but Davis says that’s because the employer doesn’t participate in Social Security.
“At last check of my 401a, I have $53,000 in retirement. It’s in a managed fund and because it’s managed, Holly and Jonathan say it will cost me a lot of money over time,” Yarnall says. The planners found funds within Yarnall’s plan with much lower expense ratios and he switched into them. They have the same aggressive stock exposure as his previous fund.
Even though he didn’t always love what he learned regarding how much house he can afford, he’s grateful to the planners for setting him up for success.
“As far as the goal of purchasing a house, well, they can’t give you more money,” Yarnall says. “When it came to overhauling my retirement, I didn’t have the financial literacy to figure that out. Holly and Jonathan have saved me money over my lifetime. Quite literally.”
Getting a VA loan — when does it makes sense?
“If I hadn’t joined the Guard, my student debt would have been more than $100,000 and that would have been ugly,” says Anthony Yarnall.
He figures he saved $50,000 by joining the National Guard in order to get in-state tuition at the UW. And now he could reap another financial benefit.
Next year, when he’s been serving in the Guard for six years, he’ll qualify for a Veterans Affairs loan. It could get him into a home more quickly, because he could finance a home purchase with as little as $0 down and without having to pay for mortgage insurance.
But is that a good idea? The interest rates on VA loans are usually lower than conventional mortgages. Right now, a VA loan is a little under 3% while a conventional loan averages 3.25%, according to Caliber Loans, a provider of VA loans in Washington state.
VA loans aren’t free, though. Financial planner Jonathan Coleman points out that there’s a fee that could be as low at 1.4% with a down payment of 10% or more. With a down payment of less than 5% the fee is 2.3%
“If you have a 20% down payment it would probably be cheaper to get a conventional loan,” says Coleman. “Avoiding mortgage insurance is one of the main benefits to VA loans for those with down payments below 20%.”
Also, the fee for a VA loan gets bigger the second time a buyer applies. So, planners say Yarnall might be better off going conventional for his first, probably more modest home purchase, and getting a VA loan when he’s ready to buy his dream home.