1. Welcome to SportsJournalists.com, a friendly forum for discussing all things sports and journalism.

    Your voice is missing! You will need to register for a free account to get access to the following site features:
    • Reply to discussions and create your own threads.
    • Access to private conversations with other members.
    • Fewer ads.

    We hope to see you as a part of our community soon!

How to solve the student loan crisis?

Discussion in 'Sports and News' started by Stitch, May 19, 2012.

  1. poindexter

    poindexter Well-Known Member


    I don't see Dave Ramsey mentioned in this article.
     
  2. Stitch

    Stitch Active Member

    With a six-figure salary, he could have repaid the loan within 6-7 years easily, while still socking away the max employer contribution from his 401k?

    Paying $2000 a month, the loan would be paid off in 4 1/2 years with $15,000 in interest. I'm sure the employer match during that time would be more than $15,000.
     
  3. doctorquant

    doctorquant Well-Known Member

    I think you might be overstating the "penalties" aspect of it. Yes, he has to pay the penalty (and the taxes), but he'd have had to pay the taxes (including payroll taxes) anyway. So in all it's fairly close to a wash tax/penalty-wise. Do the numbers add up? No ... but his peace of mind was apparently worth a lot of money.
     
  4. Stitch

    Stitch Active Member

    It's funny a business professor would consider emotions in a business transaction. Doesn't that type of action get you kicked out of business departments?
     
  5. LongTimeListener

    LongTimeListener Well-Known Member

    Huh?

    If he took out $50,000 -- which, granted, is a number I'm just pulling out of the air -- he would pay:

    --$5,000 in penalties
    --$14,000 in taxes (assuming he is in the 28 percent bracket)

    If he leaves that money in his 401K, and if he puts more money in his 401K, that is all pretax and is never taxed as income. It is only taxed upon withdrawal in 35 years.
     
  6. doctorquant

    doctorquant Well-Known Member

    Nah ... individual utility is an entirely valid construct. Remember, though, that this guy did this for/to himself with his own money. Once you start running other people's money through your own emotional blender, however, we biz profs get bent out of shape in a hurry.
     
  7. Stitch

    Stitch Active Member

    One thing we don't know is if the guy hates his job and wants to live in his car on the beach. Maybe he just wanted to pay off the student loans and get a job at a banana stand.
     
  8. doctorquant

    doctorquant Well-Known Member

    The money he took out of his 401K, he had not paid taxes -- either payroll or income -- on it. The income taxes are a wash -- he would have paid them then had he not socked the money away in a 401K. The payroll rate's tricky -- I'm not sure what he would have paid on his contributions, because the number varies depends on when he earned the money. At worst, he's taking a 5% hit. Possibly, it's no more than a 2.35% hit. So on a $50,000 withdrawal, his tax hit is, at worst, $2,500. The lost future earnings is a wash, too, because the cash flow he can invest in the future is now larger than it would be otherwise.

    Again, the numbers don't add up, but his peace of mind didn't cost him too much.
     
  9. LongTimeListener

    LongTimeListener Well-Known Member

    You are assuming that his 401K money would have been put in play at some point soon, hence the taxes would have been paid. I am saying that he could have taken the other measures of austerity and STILL kept his retirement fund and built on it, incurring no extra tax bill and still accomplishing his goal of paying everything off in the short term. Maybe not short enough to get a good blog out of it, but still plenty short enough to maximize the financial aspect of all the decision-making.

    There are also a lot of other ways to use that 401K money, such as "lending" it to yourself for home purchases, that put it in play without converting it to taxable income.

    I can't really understand anyone taking a block of money and discounting its buying power by 38 percent right off the bat. But that's just me.
     
  10. novelist_wannabe

    novelist_wannabe Well-Known Member

    He now has a minimum of $700 a month (15-year plan) more to put toward those cash reserves. That money no longer has to be earmarked for the student loan payment. He can use it to slingshot himself past what he lost on the front end.

    They're more likely to lend you money if you have no debt load, and because he has the flexibility to save the money he is no longer spending on student loan payments, he's less likely to have to borrow in an emergency in the first place. If he become unemployed, the student loan payment is one less payment he has to worry about. Beyond that, if he finds a job that he'd be happier in but pays less, he has more flexibility to take it because he has removed servicing his debt load from the job-change equation.

    The more I ponder what this guy did, the better the decision looks to me. I'm not saying it came without a price, but in his situation it seems clear it was worth it.
     
  11. doctorquant

    doctorquant Well-Known Member

    I get where you're coming from, and I agree with you. I just think you are overstating the hit he actually took. He put money aside in a 401K. That money was inflated, in a sense, by the fact that he didn't have to pay taxes -- income and payroll -- on it. When he got it in his head to take it out, he simply paid those taxes that he would have paid anyway, plus a bit of a penalty. He winds up a bit behind where he would have been, but not drastically. And apparently that little bit was worth it to him.
     
  12. LongTimeListener

    LongTimeListener Well-Known Member

    Again you're making the big mistake of assuming that his only options were to pay it off within one year or 15. Those are not the only options. Not by a long shot.

    Try going into the bank and telling them you need $100,000 for an emergency because you have no cash, but you're good for it because you have no debt load. Let me know how it goes.
     
Draft saved Draft deleted

Share This Page