How to solve the student loan crisis?

He said he saved roughly $40,000 in interest that he would have paid had he stayed on the 15-year schedule for repayment of his loans.

You guys need to figure out how a mortgage works.

15 years. Nobody is saying he should have stayed on the 15-year schedule. But he did not save $40,000 in interest by paying it off in one year instead of three. If his interest rate was 7 percent -- which would be a bit high, because student loan debt is about the cheapest consumer debt there is and the Stafford fight in Congress was about doubling it to 6.8 percent -- his interest charges in the first three years would have been about $15,000.My guess is he was paying closer to a 4-5 percent rate, which would have left him paying closer to $10,000 in interest over the next three years.

So he flushed away his 401K, the taxes and penalties he needlessly endured for withdrawing from his 401K, the future growth potential of that 401K money he decided to pay out in taxes, the money he chose to keep on his tax bill from this year's income, and the free money he chose not to take from his employer.

Great move.

 

Yeah, seems stupid to walk away from the 401-k and the matching money unnecessarily. He could still have accelerated his payment schedule. Somehow, I kind of doubt he was anywhere near the top of his Harvard Business School class.

 

OK, let's say he only saved the $10,000 in interest. On a three-year plan, he'd still be obligated at about $2,800 a month to pay that interest and the $90,000 in principal. Using that amount, he can recover the lost 401k money pretty quickly. I don't see how this is a poor move. He has more options without the debt than he had with it.

 

He can't ever recover the money he gave the IRS in taxes and penalties.

 

Mine's paid off. Don't need any lessons, but thanks just the same. :


[/quote]He has more options without the debt than he had with it.[/quote]

Exactly. People have just become so accustomed to debt as a part of life that they cannot conceive what you can do if you eliminate it. And they have no interest in trading a few months (or years) of financial sacrifice for a lifetime of financial freedom. Live for today. Deal with tomorrow (or cry to the government for help) when tomorrow comes.

 

Believe it or not BTE, we are coming from the same place and have the same general outlook. I am 40 and will have my mortgage paid off by the time I am 50. I could have had it paid off at 45, but at the rate I'm paying and with where I am on the amortization schedule, it didn't make any sense to add a few thousand bucks a month. I ran numbers and I'll come out way ahead even paying an extra five years of the interest (which as you know is very low at the end of the loan).

As for options, the #1 thing that gives you options is cash, not being debt-free.

There is this confusion, maybe because of the Dave Ramseys of the world, that any debt is a bad thing. But low-interest, well-managed debt -- and debt for a good purpose -- is a good thing. It's the thousands of dollars of credit-card debt, the car purchases or the home-equity loans to go on vacation and buy timeshares that's the debt to avoid.

This was good, manageable debt the guy had. And he cost himself way too much in taxes and lost opportunities to get rid of it.

 

I don't know much about Dave Ramsey, but my brother in law started listening to his show a year and a half ago.

He and my sister in law are making a concerted effort to eliminate all their stupid consumer debt. He is showing real discipline in maintaining a budget... All of this newfound fiscal discipline came from listening to Dave Ramsey.

Why is he castigated here?

 

This is the first I have ever heard of Mr. Ramsey.

That being said, it is incredibly vexing that the price of higher ed is skyrocketing at the same time the value of a bachelor's degree is plummeting.

 

Assuming you have income, you have more cash if you are debt-free.

What you're talking about is the difference between acceptable debt and wasteful debt. This guy had a choice between debt and no debt. In my mind, that's different. To me, there is no question that no debt is better than debt.

We may have to agree to disagree here, but I don't think the numbers support this assertion.

 

poin, for the reason I just stated -- not every single bit of debt is terrible. For the people who listen to Ramsey, usually they come to him out of desperation or when they're in a hole, and it sounds like his advice does wonders for them.

But again, this was a rash decision by the B-School guy that cost him a lot more in the long run. Not all debt is an awful monster.

To put it in non-student-loan terms, as I said, I (or I am assuming BTE) could have accelerated the mortgage payment schedule to finish even earlier. But if it meant cashing out a 401K, increasing the tax bill by a hefty margin and having no cash, would it have been worth it?

 

We don't know the numbers, but consider that for whatever he took out of his 401K, he paid 38 percent (maybe more) in taxes.

 

This is not true at all. You don't have the cash until you rebuild your cash reserves. In the most obvious example, you are basically ineligible to buy a house until you have 10-20 percent down. So he is going to need to re-stock his savings. But if he still had the cash, the $90,000 in debt wouldn't have been something that prevented him from buying a house.

Also in case of emergency -- granted, not a high likelihood for someone so young, but worth some consideration -- nobody is going to lend you money. Same with unemployment. That's another place where cash is the only option.