College Debt

[Guest]

I'm sure I'll get back at it eventually, but it's super-hard to justify in my own head why I should put us into another few years of deprivation (no vacations, no fun weekend trips, no eating out) just to get rid of it.

That's exactly how I look at it as well.

There is a principle of economics known as the Satisficing Theory that states that business (and people for that matter) make decisions based on adequately addressing their needs rather than optimally addressing their needs.

In this case, I would say satisficing IS the way to go because the intrinsic value of those vacations and creature comforts is not HURTING you .. only leading to a sub-optimal paydown of your debt. IMHO, that isn't a bad thing.

:2cents:

JR

 

[TXengrChickPE]

TX, congratulations on doing whatever it took to stay and get your degree. My situation (a long time ago) was not nearly as bad, but I used it as an excuse to quit. My parents (with 8 children) did everything they could to add to the grants and financial aid I got. Financial situation was very difficult. I bailed out after 3 years, with the plan to work for a year, then finish. Never happened. I know how easy it is to give up. You are tough for sticking it out. And you have a great family-in-law!
My older daughter is finishing one (1) class that she needs for her degree. She was supposed to graduate in May, but had a schedule problem for the class because she changed majors. We've always told her that we would do everything possible to give her 4 years of college. (Okay, 4 1/2 if that's what it takes.) The younger one will start college next fall. Same deal for her.

I know my family-in-law is pretty great... especially when compared to my parents! I was on the verge of dropping out before they gave me that loan. My parents basically said that it was my fault for not planning well (and refused to help me out)... the in-laws said that everybody has a rough spot here and there. What's kind of funny is that when the loan finally came due, we easily wrote the check for $1500. By that point, it didn't seem like that much money. But, at the time, it was HUGE.

 

[SSmith]

because once your done you never have to worry about that debt hanging over you and you can take vacations and eat out all you want

So would you prefer to have $0 debt with $0 in the bank, or $20,000 in debt with $20,000 in the bank? For me the answer it is easy, Im just curious what the Ramseyites would pick.

 

[SSmith]

I'd rather have $1000.00 in the bank and $1000.00 of debt, with a plan to pay off the debt as soon as possible. Then my next goal would be to have $20,000.00 in the bank with $0.00 in debt. That's Ramsey for you.

That wasn't an option. Its my game, I make up the rules.

 

[Enginnneeer]

I got screwed over pretty bad by my folks... but my in-laws were awesome!
My parents make pretty good money, and always have... but they always complained about money... and I honestly thought we were poor. They always said stuff like "We're not going to be reduced to eating dog food just to put you kids through school!" and I believed it.

You have awesome in laws Tx. No interest loan from them was definitely a gift and lowered the stressful situation at the time. I am sure they help with their grandkids when needed. and when I was younger my parents had me believing we were poorer than we were. They covered college which was a great gift.

I'd rather have $1000.00 in the bank and $1000.00 of debt, with a plan to pay off the debt as soon as possible. Then my next goal would be to have $20,000.00 in the bank with $0.00 in debt. That's Ramsey for you.

Its good advice except I havent really heard of Ramsey (and no I dont think I live in a cave). I know his stuff now.

I think it would be great to give the kids their education. I like the 529s since its tax free. Put a few in $1k in a year along with the 401k/roth plans. Once you start doing it you really dont miss the money (unless youre at a stop light in front of that cool new BMW or Acura you wanted instead settling for the new honda or toyota, sux. except they are in debt not you).

 

[roadwreck]

So would you prefer to have $0 debt with $0 in the bank, or $20,000 in debt with $20,000 in the bank? For me the answer it is easy, Im just curious what the Ramseyites would pick.

Well, Ramsey says you're supposed to have an emergency fund of $1000 while you're paying of your debt, so no you should never have $0 in the bank.

so I guess the answer to that question would be $1000 in the bank with $1000 in debt.

I'd actually never heard of Ramsey until recently, and I was already out of debt when I did hear about him. So I personally never followed his plan. But I like his advice and think more people should make it a goal of theirs to be out of debt.

 

[SSmith]

Alright let me rework this so I can get people to answer. Which situation would the Ramseyites choose?

Situation 1:

Day 1: $1,000 in bank with $0 debt.

Day 2: $1,000 car repair on sole transportation vehicle for family with no option but to repair.

Day 3: $0 in bank with $0 in debt.

Situation 2:

Day 1: $21,000 in bank with $20,000 debt.

Day 2: $1,000 car repair on sole transportation vehicle for family with no option but to repair.

Day 3: $20,000 in bank with $20,000 in debt.

 

[TXengrChickPE]

I think situation #1 is still the better option. Also, as soon as Ramseyites get to $0 debt, they are supposed to start their 2-3 month emergency fund... so there would really only be a very short period of time that a Ramseyite would be at the $1000/$0 situation.

Also, we are Ramseyites... but we have 2 credit cards that have large "available" credits, so if anything came up that went beyond the $1000 emergency fund, we could do it. Granted, we'd be going backwards... but we won't be canceling those lines of credit until we have the 3mo fund set up...

 

[roadwreck]

SSmith,

The math says you should play the interest rate game, but I promise you there is more to finances then math. You would not believe how things start to turn in your favor once you get to the point where you decide debt is not for you. I'm 28, I have zero debt beyond my house. I fully fund my retirement and I pay 150% on my mortgage. I have money in the bank (car repairs don't scare me -- in fact if need be I could go but a new one tomorrow) and it feels great. I had never heard of Dave Ramsey before I started on this path, but I fully endorse what he preaches. There is nothing better then being financially secure, you live smarter, you feel happier, and the stress of keeping up with payments is gone.

It's a lot of work, but I really think it's worth it.

 

[SSmith]

How is having $20,000 in the bank and $20,000 in debt not financially secure? BTW I fully fund my retirement + ROTH and have 6 month savings for emergency. So just curious how having debt + money in the bank is less secure than someone who has no debt and no (or little) money in the bank.

SSmith,
The math says you should play the interest rate game, but I promise you there is more to finances then math. You would not believe how things start to turn in your favor once you get to the point where you decide debt is not for you. I'm 28, I have zero debt beyond my house. I fully fund my retirement and I pay 150% on my mortgage. I have money in the bank (car repairs don't scare me -- in fact if need be I could go but a new one tomorrow) and it feels great. I had never heard of Dave Ramsey before I started on this path, but I fully endorse what he preaches.

 

[roadwreck]

How is having $20,000 in the bank and $20,000 in debt not financially secure? BTW I fully fund my retirement + ROTH and have 6 month savings for emergency. So just curious how having debt + money in the bank is less secure than someone who has no debt and no (or little) money in the bank.

I'm not saying it's not, but having $20,000 in the bank and no debt, plus a fully funded retirement and 6 months of savings for emergencies is better.

 

[benbo]

Alright let me rework this so I can get people to answer. Which situation would the Ramseyites choose?
Situation 1:

Day 1: $1,000 in bank with $0 debt.

Day 2: $1,000 car repair on sole transportation vehicle for family with no option but to repair.

Day 3: $0 in bank with $0 in debt.

Situation 2:

Day 1: $21,000 in bank with $20,000 debt.

Day 2: $1,000 car repair on sole transportation vehicle for family with no option but to repair.

Day 3: $20,000 in bank with $20,000 in debt.

Everyone is different, and some of it depends on your personality, your job security, etc. Some people just cannot stand to have any debt at all. My sister is like that, she is a total miser and is fairly comfortable financially. But she is such a miser that when my mom left us a rather substantial amount of money, she refused to hire a tax person and wanted to "copy" our tax returns. Of course that's just her.

I have zero debt, and I'd like to stay here. I am not very disciplined, and could very easily build up a substantial debt. I wouldn't want to take the risk of getting in much debt because I could always probably find a way not to pay it down and end up losing money.

That said, I think the logical choice depends on how much interest you are paying and how much interest you are receiving. If I had 20K in some sort of investment earning me 8%, and I had 20K that I could consistently keep at a guaranteed 2% interest level, it would just not be logical to use the 20K savings to pay the 20K debt. Assuming I was disciplined enough and paid enough attention to everything. But I'm not. Right now, with all the credit card offers I keep getting, I could probably get 30-50K right now for 6 months at a 0% interest rate, and I could probably find a 6 month CD somewhere that would give me around 4%. But no way would I do it. I don't trust myself to pay it back on time.

A lot of people become millionaires through careful saving and no debt, through the power of compound interest. But not many people become billionaires without taking on some risk and that includes debt.

 

[SSmith]

I guess I cant really relate to debt controlling people. Ive always viewed it as a tool. It got me through school. It got me 2 houses now. I meticulously track where every penny in our budget goes. Maximize the use of our credit cards to get another 2% reduction. Pay card off monthly. And have good amount of money in the bank. But I also have debt that I am choosing not to pay off that I could. Its never kept me up at night and its never driven any of our life's decisions.

I suppose my perception of risk is different than those who have chimed in.

 

[Guest]

I guess I cant really relate to debt controlling people. Ive always viewed it as a tool. It got me through school. It got me 2 houses now. I meticulously track where every penny in our budget goes. Maximize the use of our credit cards to get another 2% reduction. Pay card off monthly. And have good amount of money in the bank. But I also have debt that I am choosing not to pay off that I could. Its never kept me up at night and its never driven any of our life's decisions.

Agreed. I look at it as a tool to manage my expenses because I have had some nasty things get hurled at me including (as of recent) and rather ugly divorce. I am going to end up taking some major bites out of the shit sandwich but I will have mechanisms to control my financial hemorrage. I would only add that there are others who find themselves in similar circumstances that may not choose to pay down their debt for similar reasons ...

I suppose my perception of risk is different than those who have chimed in.

Engineers, in general are risk adverse, so it is not surprising that perceptions or views of risk would be different.

However, I have to wonder, why in the fuck are you thinking about risk/reward at 2 AM ??!!! :laugh:

JR

 

[TXengrChickPE]

We learned the hard way that we are not good at meticulously tracking every penny... we would get credit cards with the intention of paying it off every month... then "something" would come up and we wouldn't pay it off that month... which made it harder to pay it off the following month...

 

[Katiebug]

So would you prefer to have $0 debt with $0 in the bank, or $20,000 in debt with $20,000 in the bank? For me the answer it is easy, Im just curious what the Ramseyites would pick.

Ramsey says you'd have $1000 in the bank and throw the other $19,000 at the debt, so you'd have $1000 in the bank and $1000 in debt if you started off with $20K in debt and $20K in cash to play with.

Ramsey's plan is pretty simple - get $1000 in the bank for an emergency, throw all extra money at non-mortgage debts, when those are eliminated, throw all extra money towards building a 3-6 month emergency fund, save 15% of gross income for retirement, save for kids' education, pay off the mortgage (in that order). It's very sensible, in my opinion, which is why we followed it to an extent.

We were very intense with the process and got rid of a LOT of consumer debt - credit cards, two car loans, furniture financing, medical debt. It was a lean 2 years, though. Honestly, it wasn't much fun (nor is it meant to be). We decided that moving forward it's more important for us to also save for some fun things, and to build a little more "fun" into our budget. We'd rather take a $1200 vacation every year than put $1200 towards my student loan or the mortgage.

It is awesome to only have a mortgage and my student loan as debt. It felt great to get rid of all of that other debt, but we can't go on in that mode for another year (which is how long it'd take to get rid of the student loan). Emotionally, we need to start putting some money aside for much-needed renovations and home improvements, and putting money aside for when we have a baby. And we need to start spending money on us. Ramsey's motto is to "Live like no one else, so later you can live like no one else" - i.e. sacrifice now to win later. That's true, but living the next decade or two in a spartan lifestyle is not my idea of a good time either.

We're focused more on balance these days...to each their own, though!

 

[Capt Worley PE]

I guess I'm going to have to Google Dave Ramsey....

 

[FINK_RB_PE]

The main factor with the Ramsey plan in cash flow. Usually the people that call in are in a dire situation, but to the average person, the less you have to make to survive, the better you will be able to fund retirement, emergency fund, etc. so that when a problem arises you do not have to put everything on hold, you just pay for it. I started to follow the Ramsey method about 18 months ago and the only debt left is my house and my wife's student loans and I can not explain how good it feels not to have to write those checks every month, the peace of mind by far out weighs the small difference in interest.

 

[SSmith]

I have several big problems with Ramsey. I used to listen each day while I was working on my MBA. I had to stop listening after I realized just how empty his show is. I'm glad that some people find value in his products. I was just really surprised there were so many here. It seems like most of the stuff he covers would have been covered at length in some Engineering Economics class (if not Finance) that is a part of most curriculum.

Here's my beef:

1. His path isn't the most efficient way to pay off debt. He recommends sorting your debt from least amount to most. You pay all the minimums, and then throw what you have extra at the smallest amount. According to his plan, if I have a 0% BT on a credit card for $1000 and $1001 at 100% for my bookie, I should put everything towards paying off the 0% and then focus on the 100% interest debt. Anyone see the problem here (besides gambling)?

2. He trains people his method for finance, but doesn't educate people about finance at all. First of all, anyone that calls his show is already admitting a lack of mastery of personal finances. But instead of educating that people that need most to know about financial concepts and how to apply them, all he does it repeat his rules over and over all the while pushing his books.

3. He says he has a heart of a teacher. Thats just marketing because truthfully he has a heart of a salesman. Just count the number of times he plugs FPU, his website, or his books/tapes in a segment. Its sickening. If he was really interested in teaching, he would make an earnest attempt to educate people instead of preconditioning them into buying his products to solve their financial issues.

4. Its absolutely disgusting how he panders to the religious community by relating financial responsibility with religious obligations. Finance is an mathematical matter, not a superstitious one. Any attempt to combine the 2 is at best misrepresenting the content to generate sales through the local 10% admission clubs.

The proverbial horse is dead.

And it has been kicked.

 

[Dleg]

I am fortunate that my parents paid for most of my education (at a State school), along with a childless uncle of mine, but I also worked full time through every break, and part time through two years of high school to help pay for it, though my contributions were pretty minimal (minimum wage back then was $3.25?).

My kids, on the other hand, are most certainly going to need loans to make it to college. It's a different world today, I'm afraid.