Potential Pitfalls For Paying Off Someone Else’s Debt

I received a really interesting story from a reader named John. He has his financial head in the right place, but some other pieces of his overall life puzzle aren’t quite in alignment. Take it away, John:

I am 29 years old and I have just recently started to jump into real estate investing part time in my hometown. I currently work a regular full time job that pays $43K a year. Just last month I sold my first “project house” and used the profits to be completely debt free (other than my $110K mortgage, 5yr fixed @ 5.9%). I also now have $40K left over sitting in a high interest savings account (5.05%). My plan was to hold onto this 40K and use it to further my real estate investing career. I would use it for downpayments, renovations etc. Without this money, I really do not have any other way of purchasing my second “project house”.

I have been living with my girlfriend for over 2 years now and I am 90% of the way to having the money saved to buy her an engagement ring (should be there by Nov). She just finished school and is coming out holding a little over 20K (interest of ~6% on both) of school debt. Her current full time job is paying her only ~$30K a year.

My question is this:
Should I use 20K of the 40K that I have saved to pay off these student debts?

Pros:
* 20K will take her quite some time to pay down when she is only bringing in $1500 a month and it will be pretty hard on her.
* She (we) will save quite a bit in interest costs by paying this off completely.

Cons:
* This move would limit my RE investing options, as I would only have about 20K to work with.
* I am worried that she won’t learn the value of being debt free as she hasn’t experienced what it is really like to be frugal.

John’s in a situation where there are a lot of questions about his immediate future that he needs to answer. Let’s move through some of these questions one at a time and see how they affect John’s best move.

First, is she going to accept his marriage proposal? This is a very important question because it may likely lead straight into wedding expenses and other such costs associated with this, meaning that he probably would want to have the cash for the wedding liquid rather than tied up in real estate.

Next, would he still want to pay off her loans if she didn’t accept the proposal? Some people might automatically believe the answer here is “no,” but it depends on who John is as a person and also the type of relationship he has with this woman. If the debt repayment is contingent upon the proposal or upon the marriage, then he should wait to pay it off – if it is not, he should pay the debt off immediately.

Also, how valuable is this real estate investing career? For time and money invested, how much did John actually make on the first house? I would figure up an hourly rate including all time invested and all costs and see how it did. If it’s minimum wage or less, the real estate career should be viewed as a hobby and put somewhat on the back burner compared to eliminating debt and paying for the wedding.

I’m also not sure about the comment about “hasn’t experienced what it is really like to be frugal.” I think that’s an issue you need to talk about within the relationship, as there is no advice that can really be given to address that aspect that isn’t pushy or assumes quite a bit about the relationship. Just sit down and talk about frugality and spending – make sure you both understand that the best way to go over the long term is to always spend less than you earn and the bigger the gap, the better.

My perspective is this: if you are sure that you are going to be married in a year or two and you’re not in the middle of a real estate boom, your best bet is to pay off her debt immediately, then pay for the wedding without incurring more debt. If either of those assumptions are in question, then the situation requires a lot more detailed thought.

Of course, with a situation as complex as this, I’m sure my readers will have some additional ideas.