Refreshing story about responsibility

Discussion in 'Off-Topic Discussions' started by Randell1234, May 19, 2012.

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  1. Randell1234

    Randell1234 Moderator

    Here is something you do not see everyday-

    Wiping Out $90,000 in Student Loans in 7 Months
    Faced with $90,000 in student debt from his days at Harvard Business School, Mihalic vowed last August to eliminate every penny by this summer. He did — three months early...He made his last student-debt payment six weeks ago. 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.

    Wiping Out $90,000 in Student Loans in 7 Months - Yahoo! Finance
     
  2. CalDog

    CalDog New Member

    Somehow I don't think student loan debt would be a pressing national concern if everybody received a "low-six-figure salary" as soon as they left college.
     
  3. SurfDoctor

    SurfDoctor Moderator

    Agreed. However, even though he was earning a respectable salary, paying off that kind of loan in less than a year would call for a fair amount of discipline and sacrifice.
     
  4. CalDog

    CalDog New Member

    It certainly would. In fact, some of the sacrifices that he made appear to be financially irrational:

    -- He liquidated his individual retirement account, drawing a tax penalty.

    -- He stopped contributing to his 401(k), even though his employer offers a matching contribution.

    From a financial standpoint, these are actually not good ideas. As it states in the story, he saved $40,000 in interest by using extra cash to pay off his loans 14 years early. The problem is that he would have gained even more than $40,000 over 14 years, if he had put the same extra cash in an IRA with a matching employer contribution.

    The guy went to Harvard Business School, but ironically he acknowledges that his approach was not based on financial considerations:

    It's certainly great that he paid off his student loan debt, but his "emotional decision" may not actually be a good example for others to follow, especially if they don't have salaries in the low six figures. As the news story notes:

     
    Last edited by a moderator: May 19, 2012
  5. I just read this article. I think it is totally slanted. To me, things like this only play into the concept of "it's OK to take out a TON of student loans". This guy's story is by far and large the exception to the rule. It's a good story but it's almost been painted as "you can do it too". Glad for him though.
     
  6. SteveFoerster

    SteveFoerster Resident Gadfly Staff Member

    Every time you go out to eat instead of cooking at home you're making an emotional, financially irrational decision. But we all do it, and I don't think it's necessarily a bad thing. This guy's not asking for a bailout, so to me, if that makes him happy, good for him.
     
  7. CalDog

    CalDog New Member

    But there's a difference. When you make the decision to go out to eat instead of cooking at home, I'll bet that you have a very good idea of what the restaurant is going to charge you. So you are making an informed decision, based on a comparison of the (financial) costs vs. the (emotional) benefits.

    The guy in the story, on the other hand, is pursuing emotional benefits without any apparent idea of the financial cost. And that cost is potentially much higher that that of a restaurant meal or two. Obviously there is a financial cost to choosing $1 of debt service instead of $2 of retirement savings. (Remember, his employer matches retirement contributions, so $1 put in retirement savings becomes $2).

    I would be more sympathetic if the guy could estimate the long-term financial costs of his strategy, vs. a conventional payment plan. And as a Harvard MBA, he should certainly be in a position to do this. But it appears that he only weighed the emotional benefits, without ever considering the monetary costs, and in that case he is just another person making uninformed financial decisions. It's true that his income may give him unusual latitude to make uninformed financial decisions, but he's still not a shining example of fiscal responsibility.
     
    Last edited by a moderator: May 20, 2012
  8. skidadl

    skidadl Member

    I agree that he could have gotten more mileage out of his money had knocked the debt out slower and kept some of his assets. You are only looking at it from one perspective though. From an emotional and well being stand point it feels much better to me to not have a dime in the bank and not owe a single person.

    I chose to live closer to this model and I have great peace of mind. Now that I am closing in on close to zero debt I feel more free to start increasing my saving.

    I know that if you put it all on a spreadsheet you come up with better numbers using the method that you are suggesting but I don't really care for having debt.

    I own a small thriving business and I do not have any debt to speak of. I own 2 trucks, 2 box vans, lots of equipment and tons of tools. I don't owe anybody any interest. That feels really good. I could walk away or liquidate without much of a thought.
     
  9. CalDog

    CalDog New Member

    Look, I know that some people are very uncomfortable carrying debt. I get that.

    And I know that they are willing to pay extra to live debt-free. I get that too.

    And I even agree that this may be the right decision for them. The emotional costs of carrying the debt may outweigh the financial benefits.

    But before making that decision, it might be a good idea to make a spreadsheet, crunch the numbers, and see exactly what the financial implications are. Maybe the emotional benefits do outweigh the financial costs -- but if you've never tallied up the financial costs, then how do you know?
     
    Last edited by a moderator: May 20, 2012
  10. Randell1234

    Randell1234 Moderator

    How do you know he never did? How about the idea of being debt free and having choices. Could he have carried the loan and made a better choice financial - yes. If he had the discipline to pay off $90K in less then a year, he also has the discipline to dump $90K into savings in a year. How about being able to say, “I do not HAVE to have this job – I have some freedom”?

    My sister warned me against paying off my condo because it made better sense to get the tax deduction on interest and try to earn a higher interest rate then my mortgage (5.5%) with the extra cash I was sending in. Did I listen – HECK NO.
     
  11. skidadl

    skidadl Member

    I agree with you.
     
  12. ryoder

    ryoder New Member

    That is impressive. I made similar decisions at that age. I did not put any money into my employer matched 401k and instead concentrated on paying off my debt. I should have put in atleast 5% of my pay though.
     
  13. BlueMason

    BlueMason Audaces fortuna juvat

    ..if he uses the same vigor to now contribute to those funds, he's lost nothing - 1 year really won't make that huge of a difference. afaic.
     

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