When The Minimalists Give You Bad Financial Advice
Why paying off all of your debt is not always a good thing
On their very popular Podcast, The Minimalists recently posted an episode on debt. Generally I think the ideas they espouse are good. In a country where far too many people try to live in excess, mistaking it for abundance, The Minimalists provide a road map for people interested in living a happier life with less.
However, for those who enjoy the Podcast as much as I do, you may be as disappointed as I am with their views on debt. Ryan Nicodemus seems to take a back seat on this topic, and actually seems more reasonable, suggesting that debt can be used if necessary, but to take as little as possible and pay it off as quickly as possible. Josh, on the other hand, takes an extreme stance that any and all debt is bad — and that the only option is to pay it off immediately — even at the expense of your sanity, precious time, or opportunity costs.
My suggestion is to not be too hard on yourself if you have certain kinds of debt. Use common sense for your situation, and if you want to get on a path to freedom from debt, talk to a financial advisor or a friend who is good with their finances if you don’t have the skills yourself. Last but not least, don’t use the advice on The Minimalists Podcast for major life decisions concerning debt. They are not financial advisors, and although so many of the ideas they espouse would be beneficial to most people, their ideas on debt are not only wrong, but potentially disastrous.
I won’t go into depth on their ideas about financing your education. Sure, in a perfect world, no one would graduate with any debt for trying to better themselves with higher education. The system is naturally flawed. Many of us were not lucky enough to have wealthy parents or a trust fund so we took out debt to finance our education goals. A lot of us also worked full-time or part-time while going to school, an impossibly difficult task for which you should applaud yourself and be proud of your hard work. But many of us were/are working to pay rent and have enough money to eat while going to school.
There just isn’t enough money to pay thousands and thousands of dollars each and every semester. Regardless of whatever those goals were, the long-term earning potential for a college graduate far outweighs the costs over a lifetime (someone with a bachelor’s degree earns almost double that of someone with a high school diploma, on average). Should you minimize the debt you take on? Absolutely. Schools should do a better job to help students understand the long-term implications of taking on student debt so that the spring break you want to take in Cabo or that summer in Italy doesn’t look so compelling.
As just one example of the financial advice espoused on The Minimalists podcast, on their most recent episode on debt, they had a caller pose a question via voicemail. She took on $70,000 in debt to go to graduate school and now works for a nonprofit. There is no way for her to erase her decision to take on this debt. However, by working in a public service field, she has the opportunity to have her loans forgiven through the Public Service Loan Forgiveness (PSLF) program through the U.S. Department of Education. Under this program, if you do not make a lot of money (a meaningful career in public service — go figure), you can get on an Income-Driven Repayment Plan. These programs can limit your payment to 10% of your disposable income, as defined by the amount you make over a certain percentage of the national poverty line. If your loans are big enough, you may not pay even the interest on that loan. But here’s the catch: after 10 years of payments in a public service job, the remainder of your loan is forgiven. And guess what else? All of that interest that you pay? It’s a tax write-off. You will get a pretty substantial percentage of your payments back at the end of each tax year.
Her question for Josh and Ryan asked for their opinion on this, since they are so anti-debt. Should she just pay it all off as quickly as possible? What do they think of these forgiveness programs? At first, Ryan started to say that those programs are there for a reason, but Josh cut him off in the condescending way he responds to any debt question, and says to “pay it off as quickly as possible”. Below I run a few basic repayment scenarios outlining why his advice is not only wrong, but counter intuitive and detrimental to your life and financial position if you are on the PSLF program.
Let’s look at some repayment examples.
Scenario 1 — Normal Payment Plan:
$70,000, 7.5%, minimum payment ($517.29) @ 25 years (normal gov’t pmt plan) = $155,188.15 paid in both principal and interest.
Scenario 2 —Josh’s suggestions to pay off as quickly as possible (assumes double payments):
$70,000, 7.5%, double payments ($1034.58) @ 7 years 5 months = $91,277 paid in both principal and interest.
Scenario 3 — The PSLF Program:
$70,000, 7.5%, income based repayment plan ($400 @ 2% increases annually) = $52,558 (the rest forgiven).
Savings on the PSLF program as compared to the double payment scenario:
This is no small sum.
With a conservative hourly wage at a nonprofit earning $20/hr, after taxes rated at 25%, equals $15/hour after taxes (and take-home pay is likely less after considering payments for savings and benefits).
This is $31,200/year, or $2,600 per month. Double student loan payments would be almost 50% of their income for 7.5 years.
In this situation, that $38,719 is 125% of this woman’s yearly earnings. A year of her life wasted to repay debt that would’ve been forgiven anyway. And this doesn’t even consider the tax implications.
The opportunity costs, time and enjoyment in life lost (extra job, extra time worked, impossibly razor-thin budget), wasted money. Everything in the “repay as quickly as possible” scenario is just bad personal finance unless you have a boatload of disposable income, which is very unlikely to be the case if you work in public service. You pay for 2.5 more years in the PSLF program than the double payment scenario, but you end up paying almost $40,000 less at the end of the day.
We can debate whether or not it was a good idea to get into this much debt in the first place, but the ideas presented on the program for a situation she cannot get out of, are not only ill-advised, but are just really bad advice that doesn’t make dollars and cents.