Round 2: I believe the writer has some flaws in her mathematics in this round. From the article: However, in the case of the reader with a $39,000 loan, the math changes: The interest would be $1,365 after taxes, that translates to $983. Subtract that from the $864 earned on the $30,000 savings account, and you get minus $119. Round two goes to me. However, while the interest on the debt is $1,365 and the taxes decrease this burden to $983, exceeding the earnings of the $30,000 savings account at 4, the writer forgets to account for the fact that, if the reader chooses to commit all $30,000 towards his or her $39,000 debt, there remains a $9000 debt. This $9000 incurs interest to the tune of $315, translating after taxes to approximately $227. This adjusts the net savings from a loss of $119 to a gain of about $109. The moral of the story is that debt and cash are just negative and positive dollar amounts. If you can invest $30,000 at 4.0 and incur interest on a debt at 3.5 for the same amount, you necessarily have to break out better than even. While the writers arguments about future uncertainty are mathematically valid, she forgets to recognize that once the reader is unable to find a suitable investment interest rate, she or he can still turn the money over to paying off the debt at that later date.
By quandary87 | Oct 8, 2006 1:31:43 AM | Request Removal
This view of paying off student loans is too simplistic and doesnt take into account several variables. I completely agree that its important to pay off all debt. However, people can lose their jobs. For the first option, keep $10k for a rainy day, and use the rest to pay off the debt. Furthermore, that 10k could be used to pay for a car should the person NEED it not just want it. Car note interest is not deductible. I think that other variables need to be considered. Not everyone has a safety net, and its always a good idea to have some spare cash on the side. The hard part is making sure that you dont spend the rainy day fund.
By mmreay | Oct 8, 2006 8:56:38 AM | Request Removal
I cant disagree with this author more. Let me try to explain from three different angles. a Cost of funds versus rate of return: A long-term investment in the equities market should yield better than the student loan that most be paid with interest at 3.5 So the equities investment should yield better than 1-tax rate x 3.5. Thats a no brainer. I think she admitted this. b Liquidity: Think of a scenario where you have $10,000 in debt and $10,000 in ready cash. One might argue that this is equivalent to $0. But its much more useful to have some cash available as the debt and cash-combination if the cost of the debt the interest rate is reasonable. Why not be in a position where you enjoy i interest income from the $10,000 ready cash and ii enjoy the optionality of having the cash? c Psychology: I cant really dispute this but I think I have an edge here still. She argues that there is value in feeling debt free. Perhaps. But most financial advisors would agree that student loan debts are one of the rare categories of good debts. These are the type of debts should be encouraged, not discouraged. What disturbs me a lot is that this columnist needed to talk to someone else to do a very basic financial and investment analysis. Isnt that her job?
By ywakim9 | Oct 9, 2006 12:47:47 AM | Request Removal
Well folks, I had a student loan DISCHARGED FOR CONSIDERATION between 1980-1983. Back then USAF {Unites Student Aid Funds] was on paper records, but the Office of Bar Counsel for the DC Bar USAF communicated with each other OBVIOUSLY NOTES of that communication were made by both sides. The result being USAF stated that they were not going to pursue the matter further. Then along came The Revival Statute, where Congress altered the previous statute of limitations on collecting DEFAULTED AND NON-DISCHARGED student loans, so guess where mine landed da, da, da. Probably 30 collection agencies later, all noting their records of the above, DOE remains vigilent in their collection efforts -- indeed, I just got another call last week from another debt collecter who again noted that they would note the records, but this time, the individual said that he at least found a SINGLE previous notation of this discharge claim, either in DOEs or USAFs records. During the 1990s, I even faxed Janet Reno [on her direct fax number at DOJ] to either bring suit or get off the pot [no pun intended. That too was completely ignorred. Most recently, I requested Bar Counsels permission to review the Bars files from 1979-1983 for notes made [that I acually saw made by a now deceased Deputy Bar Counsel in the file -- indeed he showed them to me] but the response was the Bar didnt see how any notes made many years ago would in any way impact the efforts of either DOE or USAF. Even the Bar has never taken the position that this debt is still valid, but on it goes anyway. No statutes of limitations, no doctrine of latches and apparently no general common sense either.
By brucerealtor | Oct 9, 2006 1:58:26 AM | Request Removal
Always look forward to a good laugh with this column. This one was such a dandy, had to post a response. Amazed the Post keeps this column going after all the past incorrect advice about, e.g., student loan consolidations when hundreds of students consolidated in early 2004 at her advice when it was clear to every student loan advisor at the time that, based on 90 Day T-Bill rates, they should have waited until early 2005 when they would have received even lower consolidation rates. Round 1 in the column makes no sense as it fails to consider what the 30K would otherwise be used for i.e., the opportunity cost of using the 30K to pay down the debt. [She didnt do anything in Round 1 other than prove that not paying down the debt and having all that interest is bad if you, e.g., use the 30K for a vacation. Was that her assumption? If so, huge pat on the back to the author for having to prove that one.] In Round 2, she finally realizes that you need to consider the opportunity cost and she brings in some professor of something, but what a blunder . . . they cant even think things all the way through! Egad. On the 39K loan scenario, yes you are negative $119 a year in cash flow . . . BUT I WONDER WHAT HAPPENS IF WE TAKE THE ADVICE AND PAY OFF 30K OF THE 39K LOAN???? Did they not think you will still have to pay interest on the remaining $9K??? HMMMMMM, lets see . . . given that important missing fact, you are now negative $227 9K * .035 * .72 a year in cash flow under their advice. Id rather only be out the $119, wouldnt you? DUH.
By mjohnr99 | Oct 9, 2006 9:40:41 AM | Request Removal
So, she basically lost not only Round 2, but she should lose all credibility with you readers who think this column actually provides sound financial advice. lots of good Western spiritual advice though if that is what you are looking for She also fails to point out that federal student loan debt as opposed to private at these low interest rate levels should rarely be paid off, because should you die, you are released from paying back the loan! So, again she does another disservice by presenting these simpleton 3 proofs without an important caveat that anyone doing the 30K loan pay-off should consider the extra cost of premiums that they would need to be taking out for an additional life insurance policy of $30K should they die and leave their family without the $30K they could have had in a savings account. Apples to apples Singletary. Please remember to tell the readers the whole story.
By mjohnr99 | Oct 9, 2006 9:42:21 AM | Request Removal
Anyone here looking for excellent financial advice should ignore these columns and read the WSJs Personal Journal section . . . if youve never tried the WSJ, you should now. Much easier to read then in the past. Anyone with a frontal lobe knows you keep that student loan at historic 3.5 lows and put the rest of the money in an EmigrantDirect.com online savings account paying over 5 thats the truth on rates these days, but of course the article deceives us with the 4 savings interest example. . . and if the rates on the savings account ever go down to 3.5 or below, she should tell her finance professor guru not to fear [i.e., about all the risk he cites for these risky unstable savings account rates] as one can run out at anytime and pay off the student loan at that point with the money in the savings account. DUH. Oh by the way, if they do have some other cash flow, they could also get a 6 6 month CD . . . maybe readers should spend more time at FatWallet.com instead of this preachy advice? By the way, what place does all this religion have in the Business Section of a national paper? Seems like that is always used as her fallback position when the numbers and logic dont add-up. Well, two can play that game why dont we all start citing our individual religions as well? Wonder what a hedonist who worships Dionysus would say?
By mjohnr99 | Oct 9, 2006 9:43:48 AM | Request Removal
Please can Michelle Singletary already. This is not financial advice, this is religious preaching. The advice is based on dogma, religion and Big Mama, not sound financial planning. Many of the flaws have been pointed out already. Comparing a $39,000 pay off of loans vs. a $30,000 savings is just on its face idiotic. Using a 3.5 rate of return over a 10 year time horizon is terrible. Even with a 100 safe CD laddering strategy, youd do at least 4, more likely 5. And any good financial planner will tell you that over a 10 year horizon you should be looking at 8 return.
By asmythie | Oct 9, 2006 9:10:42 PM | Request Removal
Ms. Singletary cheated on her second point. $30,000 will not pay off a $39,000 loan balance -- it will only pay it down to $9,000. The borrower will have to pay interest on that $9,000 regardless of whether she invests the $30,000 or pays down the loan by that amount. Thus, Mr. Mandells analysis -- in which the borrower is $108 better off investing the money at 4 is the correct one.
By rlwasserman | Oct 9, 2006 10:24:28 PM | Request Removal
agree, the color of money thing has definitely gotta go. - or be seriously reoriented, off the front page, or maybe to the style section? she was so self-righteous today, with all her score one and two for me. some nerve. to top it off, she was wrong it seems. u would think you would want to be 100 sure before you take that approach in an article. like she wanted to fight her audience or somehting. bad karma. who is her audience? how many people read this stuff and are just shocked by the lack of sound financial info? i know i am. i also remember back in 2003? when she actually compared consolidating student loans to doing a home refi. its like she understands just enuff to b dangerous - or maybe she just writes these columns too quickly? back then, she was writing that rates were at a record low so students better hurry and should lock in and consolidate - well if anyone had listened, they would be in trouble now because they are stuck with that rate and missed out on the lower rates available in 2004 and 2005. i know lots of folks who saw that cloumn and paid the price. no mea culpa from her she still has never come clean that it is NOT like a refi - you can only do a consolidation once. lots of students still remember that bad column.
By hgwell2 | Oct 10, 2006 12:50:02 AM | Request Removal
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