Student Loans as Bond Distribution

[moda0306]

Just noticed this thread.  I'm gonna have to take the same position I do with paying down mortgage debt.

1) The REAL problem is people taking this debt on without properly calculating its benefit to them.  It either makes strategic sense to take on marginal debt for a marginal benefit, or it does not.

If it does, take it on, and it is NOT (IMO) a "hair on fire emergency."  It's part of the strategy.

If it does NOT make financial sense.  Do NOT take on the debt.  Still no emergency.

2) Once you've taken on the debt, even if it's at 6.5%, you already have it. If you're goint to make $50k, and pay down $20k per year in debt, you're probably better off saving the money in a diversified portfolio rather than paying it off.  Not because you'll have more wealth, but you'll be in FAR less risky of a position having liquidity vs paying off debt, considering all the life events (risks and opportunities) that can require a hefty cash position to effectively handle.


The way I look at it, going into too much SL debt sucks, but once it's done, if you are going to take that financial position to be a MASSIVE negative, then adjust for it by saving like a banshee, not by paying down the debt.

For instance, if I'd have come out of college with a ton of debt, one of the things I could have done would be to save up for a down payment, buy a 4 BR home and rent out 3 of the bedrooms and live in one.  These can be great deals. 

Further, if SL debt is such a toxic mess, what does that say about having a kid a few years out of college?  To me, having a bunch of kids is the true massive liability.  That's not to say it is "bad."  I say both are abundantly managable.  There's no reason to double down on a bad debt decision by making a bad liquidity decision.

I'd be willing to show a financial statement analysis of someone who prioritized liquidity after college over paying down SL debt. 

[4x4]

Just noticed this thread.  I'm gonna have to take the same position I do with paying down mortgage debt.

1) The REAL problem is people taking this debt on without properly calculating its benefit to them.  It either makes strategic sense to take on marginal debt for a marginal benefit, or it does not.

If it does, take it on, and it is NOT (IMO) a "hair on fire emergency."  It's part of the strategy.

If it does NOT make financial sense.  Do NOT take on the debt.  Still no emergency.

2) Once you've taken on the debt, even if it's at 6.5%, you already have it. If you're goint to make $50k, and pay down $20k per year in debt, you're probably better off saving the money in a diversified portfolio rather than paying it off.  Not because you'll have more wealth, but you'll be in FAR less risky of a position having liquidity vs paying off debt, considering all the life events (risks and opportunities) that can require a hefty cash position to effectively handle.


The way I look at it, going into too much SL debt sucks, but once it's done, if you are going to take that financial position to be a MASSIVE negative, then adjust for it by saving like a banshee, not by paying down the debt.

For instance, if I'd have come out of college with a ton of debt, one of the things I could have done would be to save up for a down payment, buy a 4 BR home and rent out 3 of the bedrooms and live in one.  These can be great deals. 

Further, if SL debt is such a toxic mess, what does that say about having a kid a few years out of college?  To me, having a bunch of kids is the true massive liability.  That's not to say it is "bad."  I say both are abundantly managable.  There's no reason to double down on a bad debt decision by making a bad liquidity decision.

I'd be willing to show a financial statement analysis of someone who prioritized liquidity after college over paying down SL debt.

I think you hit on my dilemma w/ eliminating the SL debt.  The cash on hand is freedom and piece of mind.  I could do just about anything I wanted to for quite a while if needed.  I think that is a wise perspective I was sensing but never fully cognizant of.  The question is now one of when does it change over from comfort of cash, to dropping the SL, resulting interest, and "locking in the returns."

Curious on your thoughts and analysis proposition?

[MachineGhost]

Further, if SL debt is such a toxic mess, what does that say about having a kid a few years out of college?  To me, having a bunch of kids is the true massive liability.  That's not to say it is "bad."  I say both are abundantly managable.  There's no reason to double down on a bad debt decision by making a bad liquidity decision.

That's the open secret no one likes to talk about because it its non-PC.  Kids are accidents half the time and are a huge financial liability.  Maybe once life extension is more practical for the vast majority, the long list of negatives from breeding will become dinner table conversation.

I think prioritizing liquidty makes sense so as long as there is a) inflation and b) arbitrage.  Post the example, dude!

[moda0306]

I probably shouldn't have been so quick to promise so much.  I don't know how to post a “chart”? properly on a forum wall.  And I basically just “financial calculator”? (on my phone) a lot of my little financial dilemmas.
But basically, if you look at a graduate’s balance sheet, it will look VERY sparse on assets.  If you’re a super-saver, no matter what you do, you’re gonna look like a bad-ass in 10 years.  This is not a question of whether or not to put a ton of money towards debt-paydown or asset-accumulation…. It’s a question of which someone should prioritize. 
Overall, the math can be done pretty quickly on a financial calculator.  If you have $100k of SL debt @ 6.5%, about a $600/mo paydown will have it paid off in 30 years.

Let’s say that’s your base-payment.

The question then is, what marginal benefit paying down extra debt will be to the health of your financial situation, vs saving it.  Well at BEST, you’ll have a slight spread above what you could have earned in a safe portfolio.  And since your early years are your most vulnerable to liquidity crisis, we can focus on those.
Assuming you have another $5k to either accumulate wealth or pay-down debt, and you can get 3%, here’s what you’d look like after 2 years:

Debt-Pay-Down:
Assets: $0
Liabilities: $86,614
NW: $ (86,614)

Asset Accumulation:
Assets: $10,455
Liabilities: $97,610
NW: $ ($87,155)

So two years into the strategy, the debt-payer-downer has an extra $541.  But he’s got NO emergency fund.
Bad move, IMO.  The ongoing financial ramifications by not properly maintaining a car, suffering a job-loss, suffering a medical event, having to buy a new car, etc could put him in a precarious position.
Now some of you will say “well nobody’s saying have NO emergency fund.”?  Ok, so let’s assume he’s got 6 months of living income saved up.  $20k for this example. Let’s say he has it already.

That means my scenario looks like this, then, in 2 years:

Debt-Pay-Down:
Assets: $21,218
Liabilities: $86,614
NW: $ (65,396)

Asset Accumulation
Assets: $31,672
Liabilities: $97,610
NW: ($65,938)

I’d still argue that the second guy is in a far-better position to take on an emergency/opportunity and keep on humming.  The known quantity is the $540 he lost out on after 2 years.  The unknown quantity is what he COULD have lost out on if something bad happens, or he can’t take advantage of an opportunity (Let’s admit it… some are worth going for broke).  And once an emergency fund is depleted, you’re exposed.  You have no pivot room.  You can’t manage risks/opportunities correctly, so looking at these situations like you just address the emergency and the scenario stops is incorrect.  Life keeps going.  If the first guy has an emergency that eats up the $20k of emergency fund, the scenario DOES NOT end.  He has to live in it.

Once you pay $10k down of debt, that's $10,000 that you can never re-make liquid on your balance sheet.  If shit happens, and your $20k emergency fund handles it, 2 years later you might find it a good idea to start a family.  If that is a given, you have now permanently hampered your liquidity through the next few life events:

Wedding
Home Purchase
Home Maintenance/improvements
Kids

Now maybe all those are bad ideas.  But if they are GOING to happen, given all the uncertainties around it, I'll take liquidity every day. 

Here's a few more reasons:

1) You might eventually earn to much to contribute to a Roth, and they could close the back-door provisions
2) They might change some of the more favorable traits of a Roth, with grandfather provisions that you've missed out on
3) They might eventually forgive student loan balances, or make them extinguishable in bankruptcy, which will be really nice if you're having an income crisis in your life.
4) If you're doing your excess saving in a strict PP, you're stocking up on $1,250 of physical gold every year (handy in a BIG emergency).


There just simply is no truly feasible scenario I can think of, if I play it out in its entirety, where I'm significantly better off as a debt payer downer vs asset accumulator.  I can think of a TON of scenarios where I will be glad I had resources on hand.

It truly is about overall wealth-building... and paying down debt on long-term loans is the economic equivalent of locking your money up for decades for a (in this case) 6.5% rate of return, and a solid chance that the government will "steal" it later (with strong-voter support if it were to happen (equating SL forgiveness with stealing from those who paid it off who wouldn't have had to).

[MachineGhost]

My gut feel agrees with you, moda.

Losing capital is expensive to replace.

[moda0306]

My gut feel agrees with you, moda.

Losing capital is expensive to replace.

I can understand the feelings around debt. 

It's literally the antithesis of wealth.  It entices us to make all sorts of excessive purchases that we know deep-down are bad decisions.  It either comes at an exorbitant cost (CC interest) or a bill every month (mortgage & SL debt) that we HAVE to pay or our credit goes to shambles in the blink of an eye.  After we use it, we feel like it is USING us.  Controlling us.  Further, the asset we purchased with it is often as much of a painful reminder of our mistake as the debt itself.  A house we didn't realize would be so expensive and time-consuming to maintain.  A car that isn't as shiny as when we bought it or as cool as the new models that it used to be.  An education that isn't earning me any more income than my buddy who bar-tends.

I understand the feelings around it.  I almost feel bad having this debate, as I'm usually trashing (inadvertantly) someone who did a great job of improving their balance sheet, or I'm attacking someone's decisions around education and home/auto purchases rather than focusing on the nasty part of their balance sheet.

I think it's like the internet.  It's an amazing tool if used correctly, but can be the bane of your existence if you use it incorrectly.  Leverage works like that.  The thing is, it's not THAT hard to analyze whether it will be of sizable benefit or cost to you.  The problem is that we DON'T analyze it.  We just spend and buy shit... we rationalize it in the moment.  Whether it's education, a home, starting a family, buying a car, or "getting my credit score up and CC rewards cards."

[sophie]

The unknown quantity is what he COULD have lost out on if something bad happens, or he can’t take advantage of an opportunity (Let’s admit it… some are worth going for broke).

"Taking advantage of an opportunity" isn't what an emergency fund is for, is it?  It sounds more like you're talking about a variable portfolio type of investment.  Speculating on borrowed money, i.e. $97K of debt, is not the world's wisest financial move.  I could easily imagine a scenario where the "opportunity" turns sour, and now your scenario A guy is wiped out and struggling to make the debt payments.

It boils down to this:  What makes you sleep better, having knocked off an irritatingly large debt, or having a nice big cushion?  Each person gets to answer that for him or herself.  It sounds like you're solidly in favor of the cushion, but I'm a bit more concerned with the debt so I chose to split my savings between the two goals.  Once my cushion was large enough, I paid off the student loan.  That felt wonderful, never regretted it for a second.

[MachineGhost]

Speculating on borrowed money, i.e. $97K of debt, is not the world's wisest financial move.  I could easily imagine a scenario where the "opportunity" turns sour, and now your scenario A guy is wiped out and struggling to make the debt payments.

I did that once.  ONCE.

I'd say the real problem with student loan debt is you cannot, ever escape it.  It's not like all other debts that get to be written off by the lender, discharged in bankruptcy or just wait out the collection attempts.  And isn't the IRS the collection agency?  I don't fear the IRS as much as the FDA, but they're stil pretty gnarly.