How to solve the student loan crisis?

[Stitch]

According to this guy, just land a six-figure salary once you graduate. and you can pay off $90,000 in loans in seven months.

http://finance.yahoo.com/news/wiping-out--90-000-in-student-loans-in-7-months.html

 

[wicked]

Just gotta wonder what exactly he's putting in that there flask...

 

[LongTimeListener]

Mihalic also took steps that financial advisers typically say are a no-no: He liquidated his individual retirement account, drawing a tax penalty, and stopped contributing to his 401(k), even though his employer offers a matching contribution.

He should be asking Harvard for a refund if he graduated from their business school and is still that mother****ing stupid.

 

[Stitch]

I wonder Mihalic is part of the Dave Ramsey cult.

 

[Starman]

According to this guy, just land a six-figure salary once you graduate.

Damn, I should have kept this in mind when I listed "salary requirements" when I was applying to 10,000-circ. 5-day dailies.

 

[Yodel]

I wonder Mihalic is part of the Dave Ramsey cult.

Been a long time since I listened to Ramsey, but I don't think he preaches against saving for retirement.

 

[HejiraHenry]

I wonder Mihalic is part of the Dave Ramsey cult.

Been a long time since I listened to Ramsey, but I don't think he preaches against saving for retirement.

He favors a balanced approach and probably would not approve of blowing up the 401K. But, this guy can now probably sleep pretty well at night. So there's that.

 

[BTExpress]

Don't see anything terribly egregious in his decision.

Blowing up a 401(k) at age 29 makes a lot more sense than blowing it up at 39 or 49. It's not like he had half a million in there at that age.

And if he saved $40,000 in interest, then he's just as well off starting from scratch, debt free, at 29. Plenty of time to rebuild the retirement account on that salary with no crushing debt.

 

[LongTimeListener]

Who said he'd have to blow up his 401K at age 39 or 49? Why would that be the assumption?

All he would have had to do is put himself on an aggressive plan to pay everything off in 3-5 years, with the funds he has coming in, and he'd be well ahead of the game. Instead he chose to immediately forfeit roughly 38 percent of his retirement savings -- the 10 percent penalty for early withdrawal and the probably 28 percent he pays in income tax.

So if he withdrew $50,000, he just flushed $19,000 down the toilet. And this is to say nothing of the thousands of dollars in free money the company was willing to give him that he refused to take, in addition to reducing his own tax burden by putting his own money away.

Extraordinarily stupid.

 

[RecoveringDesker]

I wonder Mihalic is part of the Dave Ramsey cult.

The Dave Ramsey "cult?" Just curious what makes you say that.

 

[novelist_wannabe]

Who said he'd have to blow up his 401K at age 39 or 49? Why would that be the assumption?

All he would have had to do is put himself on an aggressive plan to pay everything off in 3-5 years, with the funds he has coming in, and he'd be well ahead of the game. Instead he chose to immediately forfeit roughly 38 percent of his retirement savings -- the 10 percent penalty for early withdrawal and the probably 28 percent he pays in income tax.

So if he withdrew $50,000, he just flushed $19,000 down the toilet. And this is to say nothing of the thousands of dollars in free money the company was willing to give him that he refused to take, in addition to reducing his own tax burden by putting his own money away.

Extraordinarily stupid.

I think BTE hit the salient point here. To me, it looks like he did the math and decided that if it were a push -- and with your numbers ($19k plus employer 401k contribution of probably $6k [$100,000 x 6 percent]) it looks he's coming out ahead if he's saving $40k in interest -- he'd just as soon not have that debt hanging over him. Now, he can throw the money he's not using on student loan payments ($700 a month) at his retirement fund. Doesn't seem stupid to me at all.

 

[BTExpress]

So if he withdrew $50,000, he just flushed $19,000 down the toilet. And this is to say nothing of the thousands of dollars in free money the company was willing to give him that he refused to take, in addition to reducing his own tax burden by putting his own money away.

He flushed $19,000 down the toilet to save $40,000 in interest. Net gain of $21,000. Smart.

Paying interest is flushing money down the toilet. That's what this country can't get through its head.

He only suspended his 401(k) contributions for the seven months he was paying off the loan. So the only "free money" he lost was what would have been matched over that tiny period. Maybe a few thousand. He's still way ahead.

Now he can aggressively contribute to his 401(k) with no crushing debt, AND because he paid off that loan he probably has a stellar credit rating, which will save him money and make life easier down the road.

People who attack debt like a piranha attacks meat are very rare ---- and rarely stupid. I made my final mortgage payment last September, and I cannot describe how liberating it is not to owe anything to anybody.

 

[LongTimeListener]

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.

 

[cranberry]

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.

 

[novelist_wannabe]

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.

 

[LongTimeListener]

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

 

[BTExpress]

You guys need to figure out how a mortgage works.

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.

 

[LongTimeListener]

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.

 

[poindexter]

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?

 

[Greenhorn]

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.