
Want to get rich? Don't pay off your student loans - prostoalex
http://money.cnn.com/2014/12/11/investing/dont-pay-off-your-student-loans/index.html?sr=QZshare
======
Raphmedia
Or you know, you can pay off your loans, never borrow again, and live a free
life that allows you to move whenever you want to wherever you want for as
long as you want without caring. Sure, you can keep those debts and ignore
them while making good money. What happens if things go sour and you can't
make minimum payment anymore?

Pay off your debts, and avoid being in someone else's pocket for as long as
you can.

~~~
ahallock
> What happens if things go sour and you can't make minimum payment anymore?

Keep paying using the money you've saved from investing. I mean, if you have
no will power, aren't organized, can't save because you have a gambling
problem, etc., paying off your student loans sooner might make sense.

~~~
unreal37
So the stock market has a little correction, and he loses his job in the
resulting recession (a la 2008). The debt doesn't go down, the minimum
payments remain the same, and now he has no income and half of the investment
amount he once did. He has to take what was his "emergency fund" and use it to
pay debt.

Debt is an awful burden to carry around for years. It limits potential
decisions. When things go wrong in life, and they do, the timing is never
great. Do "future you" a favor and ditch debt when you can.

Source: life experience

~~~
gohrt
Or file for banruptcy.

~~~
chrishynes
Student loans can't be gotten rid of through bankruptcy.

~~~
jrs235
Contrary to popular belief, while it is difficult, it is possible in certain
situations to have student loans forgiven, canceled, or discharged.

[https://studentaid.ed.gov/repay-loans/forgiveness-
cancellati...](https://studentaid.ed.gov/repay-loans/forgiveness-
cancellation#discharge-in)

~~~
dragontamer
Thanks for the link.

It still seems true. Simple bankruptcy does not wipe out your student loan
debt. You need to go above and beyond bankruptcy and win a court case against
your creditors in court _after_ you've declared yourself bankrupt.

------
mafribe
One thing I don't understand why not more american students geo-arbitrage.
There are plenty of countries in Europe where university education is much
cheaper, or even free. OK, maybe the top-top US universities might be a tad
better than elsewhere, but the difference is at best small, especially at
undergraduate level. All universities use similar textbooks, especially in
introductory courses. Moreover the single biggest factor in how much you learn
at university is how much effort you put in. Want to learn more? Party less
...

That way you can graduate debt-free, and have international experience and
network, and might even have picked up a new language.

If you absolutely have to have a brand-name degree from an American
university, get a masters. Much quicker and easier to get in.

~~~
pilsetnieks
> There are plenty of countries in Europe where university education is much
> cheaper, or even free

It's generally only for citizens or, at best, EU residents. The same
universities charge a lot more if you're not European. Though not as much as
American universities, of course.

~~~
dubfan
Universities in Germany are free for everyone, besides the semester fee which
is negligible.
[http://www.washingtonpost.com/blogs/worldviews/wp/2014/10/29...](http://www.washingtonpost.com/blogs/worldviews/wp/2014/10/29/7-countries-
where-americans-can-study-at-universities-in-english-for-free-or-almost-free/)

~~~
lwhalen
Perhaps, but then you're stuck having to learn German. The old joke being:
What do you call someone who speaks two languages? Bilingual.

What do you call someone who speaks three languages? Trilingual.

What do you call someone who speaks one language? American.

~~~
mafribe
From a career point-of-view, the ability to speak foreign languages, and a
proven track record of navigating foreign cultures is a plus.

------
elliott34
The psychological benefit of paying off my student loans early was immense.
While mathematically illogical and not in my best interest, I sleep better at
night knowing that if I wanted to drop everything I was doing and do something
else, I wouldn't have to worry about loans hanging over my head.

~~~
schimmy_changa
Definitely agree - it would have been tough for me to quit my stable job on
the east coast and come out to SF (to earn much, much more) had I not
eliminated my debt. The freedom can help you earn more as it allows you to
take opportunities that might otherwise not be available to you.

I wrote a blog post on this, actually: [http://colinschimmelfing.com/blog/why-
im-irrational-about-re...](http://colinschimmelfing.com/blog/why-im-
irrational-about-repaying-debt-and-why-its-actually-rational/)

~~~
tswartz
Completely agree with your last point that being in debt keeps you from
properly exploiting opportunities. I'm working on paying off my debt as quick
as possible too.

btw great job on Clever...very interesting.

------
evanr
What a great article on survivorship bias!

I guess the articles from graduate investors from 2008 didn't seem to make it
past the editor.

------
bosco
The issue is he is telling this story from 2009-today in a frothy market. Yes,
historically markets have gone up 9.2% on average over the last 50 years in a
balanced portfolio but what happens if he invests from 2003-2008. It's a
little different story. It's hard to use long term data for a short term
notion.

Going forward, we are in a different environment where 9% might not be the
annual return. Interest rates are almost nothing and not going back to late
70's level in the foreseeable future.

~~~
simplemts
I couldn't agree more. Has an investors returns been 10% or more since 2000?
No, 2007, no?

This guy basically got lucky by having spare income to invest at the bottoms
of a stock market. Hardly advice I would give anyone now, where investing now
is closer to buying at the top of the market at 2007 than at the bottom of
2009.

Better advice, pay off your debt with the highest interest rates first, have
an emergency fund, invest any extra income you have.

~~~
bigtunacan
I'm sure some investors lost during that time and others made well over 10%
during the same time periods.

I've always invested and paid minimums to student loans and mortgage. I also
locked in student loans and mortgage at very low rates, plus the effective
interest rate is lowered by the tax advantage.

I've been investing in low fee index funds, because I'm not a stock broker,
since 2002 and I have averaged about 14% growth year over year. That is much
higher than I expected, but even at a modest 6 or 7% annual growth I would
still be well ahead of paying off my student loans and mortgage. I never carry
a balance on higher interest forms of debt such as credit cards.

------
shawnee_
_One important concept that I came across was Opportunity Cost -- the notion
of quantifying what you give up when you chose one option over another. I
asked myself: Why am I rushing to pay off loans with 3% to 6% interest rates
when the S &P has historically returned 11%? _

This isn't quite the most sage advice. The opportunity cost of student loans
is actually the interest that compounds over long periods of time. Making high
student loan payments (as a large percent of your income) early on, and taking
advantage of the maximum deductible portion of student loan interest can be
smart.
([http://www.irs.gov/taxtopics/tc456.html](http://www.irs.gov/taxtopics/tc456.html))
But again, depends on how you "play" in the S&P.

~~~
endeavour
What nonsense. The interest paid from the S&P is compounded as well if you
reinvest.

------
virtualwhys
I just paid off the remainder of my loan today in one lump sum ($40K), enough
was enough.

Taking into account the fixed 6.5% interest rate the government backed lender
was happily reeling in, and my skeptism that the stock market can continue to
rise against printing press backed economies, I thought, screw it, let's just
get it over with.

Not sure what things are like outside the States, but within the easy-money-
for-18-year-old-kids market, it's a serious racket -- I had little awareness
at that age of what I was getting into, and only later did I realize that,
hmmm, the bachelor's in literature and master's in psychology...were pretty
much completely useless given my profession: computer programmer o_O

------
closetnerd
What I enjoyed most was this recent ad by bank of america which says "student
loans are a fact of life". So instead of object to these ridiculously high
tuition fees, we should just accept debt as a fact of life.

~~~
brianwawok
70%+ of Americans accept "a mortgage" as a fact of life, and don't stress out.
Its either pay $600 to some guy to rent a house, or buy a house but pay a $600
mortgage. Overall this is not a terrible strategy, and mortgages are good for
a lot of people...

Some high % of Americans think the same thing about a new car every 3-5 years.
This is a little more insane as people could build a lot more wealth if they
drive a car 10 years, and use the extra money to invest in wealth building.

So in a perverse sort of way, I see where this ad is coming from. My guess is
with a house, you have a physical object. You can (usually) unload it and pay
the loan back. The car is losing value fast, but you are in a similar boat. I
guess student loans are an investment in your brain and not a thing, so people
hate them more?

~~~
unreal37
Getting a Masters of French History degree, with $100,000 in student debt, is
what people object to. Nothing against French History, but paying $100,000 on
a credit card to learn it is not "investment in your brain". Investment
implies the potential for a profitable return.

~~~
chockablock
Actually, "people" don't object to spending money on education and scholarship
that is not directly profitable to the student; you do.

~~~
unreal37
I have no problem with you spending your money on whatever you want. But there
is a dangerous belief that education = investment for all cases. Way too many
students leave college with $50,000+ in debt for "Community Service" degree,
and it becomes a burden they carry with them for a decade that restricts them
from travel, living comfortably, or taking calculated but smart risks such as
starting their own business.

Let's at least be honest here. There should be a relationship between size of
the debt you are allowed to accumulate, and the annual salary of the related
profession. I think there often is not.

------
acconrad
While the advice that you should pursue financial opportunities with higher
yields (10% stock returns over 6% student debt interest rates), it is
certainly not that simple.

10% RoR is extremely optimistic, especially given that we are already in an
optimistic, overpriced bull market that will not last (there are always
corrections).

In addition, this 10% is on the S&P, so you'd have to assume that you only put
money into an S&P fund and not any individual stocks, bonds or secondary
securities. Those funds have management fees, so that too eats away at your
yield.

But perhaps what is most important, is that plenty of people did quite poorly
this year (the average return it appears was around 4.5% this year) so his
assumptions are heavily weighted on speculation, volatility, and unproven
performance.

~~~
sailfast
I can't agree more with this comment. 10% return is insane to expect in the
current market, especially since there is no actual safe haven that will get
you any reliable return above inflation.

The fact that the author was overpaying because "he didn't like debt" tells me
a lot about his financial expertise to start. That aside, of course go with
the higher return stuff, contribute to your 401K for your company at the max
instead of pushing it toward student loans, but the rest of the logic is
somewhat baffling given any sort of perspective on the market.

I keep going back to the "Turkey that doesn't know tomorrow is Thanksgiving"
analogy on this. Must be bliss to have such a short memory.

------
kasey_junk
This is an example of borrowing money to invest it ie leverage. Leverage can
be a very powerful multiplier for wealth accumulation, but it is just a big an
amplifier for downside risk. Once you move into leveraged investing you need
to be much more sophisticated about your risk management. For instance, it is
trivially easy to see a situation that involves correlated risks. That is, a
massive stock downturn which causes the author to lose their job. They are
then stuck not just with their paper losses (remember that they haven't _made_
any profit yet) but they also do not have the ability to pay off their debt.

------
cplease
To add to points others have raised here, student loans are almost impossible
to discharge in bankruptcy and backed by the full range of government
collection methods (withholding of tax refunds, automatic wage garnishment,
etc.). The only comparables are tax debt, child support, and possibly criminal
restitution. There's not much of a safety net with student loans. There's some
income-based repayment and forbearance options, but you pay more over time
with these, and they only generally apply to federal loans, not private.
Likewise there's some forgiveness options, only for federal loans, not
private, and only after you've been bled dry for decades in poverty. Marry
someone who's not poor? Forget it.

Basically, if you want security, try to get rid of student loans. I built up
home equity and am now rolling my loans into a mortgage. 3% interest rate is
lower than any refi options, no worries about the rate going up, and if I ever
go broke, then worst case scenario I lose the house and am debt free.

------
ochoseis
The way I see this is, the interest rate on your loans is like a guaranteed
negative, compounding return that erodes your net worth. So, by paying down
loans with 6% interest, it's akin to putting your money somewhere with a
guaranteed 6% return, which sounds more appealing than an uncertain 8% market
return.

~~~
nisse72
If you have to pay tax on your investment return but can't deduct the cost of
your debt, then reducing the 6% debt is more akin to getting a guaranteed
return of something like 9% (more or less, depending on tax rates where you
live).

------
rbcgerard
I'm not too impressed with the author's logic, but I think that if you have
federally subsidized student loans (i.e. low interest rates) not paying down
your loans is a good idea.

The reason is that net worth and liquidity are two very different things. I'd
much rather have $20k in a checking account and a $40k student loan balance
with a $500 monthly payment then a $20k student loan balance and a $500
monthly payment.

Secondly, given the that potentially some of the interest is deductible, and
that the term on a student loan can be 10-25 years you can ~breakeven in the
fixed income markets investing in bonds as opposed to paying down your student
loan (or you can keep the maturity of those investments shorter, have a
moderately negative carry, and be short interest rates)

------
fludlight
Depends on your timeframe. The S&P returned -22% from 1/1/2000 to 1/1/2010,
and only +43% from 1/1/2000 to today. The annualized return is nowhere near
the 11% quoted in the article.

~~~
YourCupOTea
You aren't including dividend reinvestment and you are looking at the wrong
time frame for the quoted percentage.

-5.65% from 1/2000 to 1/2010 with dividend reinvestment

+89.85% from 1/2000 to 12/2014 with dividend reinvestment

The annualized returns are generally over rolling 30 year periods. which
12/1984 to today is 8.79% without reinvestment or 11.32% with reinvestment of
dividends.

[http://dqydj.net/sp-500-return-calculator/](http://dqydj.net/sp-500-return-
calculator/)

~~~
dragontamer
Dividends are taxed at your income btw. So these values only make sense inside
a tax-advantaged account.

They'll be a bit lower once you factor in taxes, which can be a sizable chuck
(especially because that tax difference "compounds" year over year in the
reinvestment case)

------
mkingston
Similarly, if your government exempts income tax on your pension
contributions, ~30% right now and "10%" p.a. is probably the best expected
return you'll make.

Even better, if your employer matches pension contributions, 100% right now is
just about unbeatable.

Of course if you don't believe your pension will be around for you when you
retire, perhaps you might disagree.

------
porter
Sure, if you can invest your excess cash into the stock market and earn more
than your interest rate on your debt, it's a net win. The problem is that he
is ignoring his downside. On a risk-adjusted basis he made a poor decision,
which he'll probably discover if the stock market crashes again and he loses
his job.

------
carsongross
But what if this happens?

[http://finance.yahoo.com/echarts?s=%5En225+interactive](http://finance.yahoo.com/echarts?s=%5En225+interactive)

------
dragontamer
Except you don't know if the stock market is going to go up 20% (as per 2009
through today), or go down by 20% (as per 2007 or 2000).

Paying off your debts is reliable. Gambling your borrowed money on the stock
market seems like poor advice in general, even if the historical average works
out.

You gotta plan for the worst, and in the worst case, your money is worth half
of what you put in two or three years from now AND you got a massive student
loan burden.

------
rayiner
One wrinkle people are missing is that, for recent borrowers, the downside
risk of not being able to make your minimum payment is eliminated. You never
owe more than 10% of your disposable income for your federal student loans,
and anything you don't pay off in 20 years is forgiven.

~~~
s_baby
I believe anything forgiven is counted as income. So you're going to be hit
with a huge tax bill 25 years later.

~~~
rayiner
It's not clear how that will be handled, and in any case, because unpaid
interest is not compounding, it's not as big of a tax bill as you might think.

~~~
s_baby
I believe it does compound but on a yearly basis instead of monthly.

Personally I was considering putting all my loan money into bitcoins but
decided to be responsible. Sort of kicking myself in the ass for that
decision.

~~~
harryh
Pat yourself on the back for excellent process based decision making and
ignore the outcome.

~~~
s_baby
I agree but it's hard to feel that way while jobless and in debt.

------
domdip
I don't know of any competent financial planner that would seriously advise
hanging onto debt at 6% and investing that money in equities. Even if this
turns out to be a good idea in retrospect, it's terribly risky.

------
alexchamberlain
You need to account for the value of debt vs the value of investment. Most
people would attribute a higher (negative) value to personal debt than
personal investment.

------
danielrpa
"Genius". He essentially borrowed money to invest in the stock market... Hmm,
that sounds familiar....

------
bko
I think the author's advice is basically to take out a leveraged bet on the
stock market.

>Sure, that is simplifying it a bit. Obviously, the stock market doesn't
return 10% every year on the dot.

He mentions this as an aside but it's very important to consider the time
period he invested in. Below is the continuous return for S&P500 in a 4 year
period:

End: 1848.36 (12/31/13) Start: 1115.1 (12/31/09) Return: 13%

End: 1426.19 (12/31/12) Start: 903.25 (12/31/08) Return: 11%

End: 1257.6 (12/30/11) Start: 1468.36 (12/31/07) Return: -4%

End: 1257.64 (12/31/10) Start: 1418.3 (12/29/06) Return: -3%

End: 1115.1 (12/31/09) Start: 1248.29 (12/30/05) Return: -3%

End: 903.25 (12/31/08) Start: 1211.92 (12/31/04) Return: -7%

End: 1468.36 (12/31/07) Start: 1111.92 (12/31/03) Return: 7%

End: 1418.3 (12/29/06) Start: 879.82 (12/31/02) Return: 12%

End: 1248.29 (12/30/05) Start: 1148.08 (12/31/01) Return: 2%

End: 1211.92 (12/31/04) Start: 1320.28 (12/29/00) Return: -2%

End: 1111.92 (12/31/03) Start: 1469.25 (12/31/99) Return: -7%

End: 879.82 (12/31/02) Start: 1229.23 (12/31/98) Return: -8%

End: 1148.08 (12/31/01) Start: 970.43 (12/31/97) Return: 4%

End: 1320.28 (12/29/00) Start: 740.74 (12/31/96) Return: 14%

Hardly the no-brainer the author makes it out to be. In fact, only half the
returns were positive. Maybe it's unfair to consider a 4 year time period,
although that is what the author states. The 10 year returns still don't look
great.

End: 1848.36 (12/31/13) Start: 1111.92 (12/31/03) Return: 5%

End: 1426.19 (12/31/12) Start: 879.82 (12/31/02) Return: 5%

End: 1257.6 (12/30/11) Start: 1148.08 (12/31/01) Return: 1%

End: 1257.64 (12/31/10) Start: 1320.28 (12/29/00) Return: 0%

End: 1115.1 (12/31/09) Start: 1469.25 (12/31/99) Return: -3%

End: 903.25 (12/31/08) Start: 1229.23 (12/31/98) Return: -3%

End: 1468.36 (12/31/07) Start: 970.43 (12/31/97) Return: 4%

End: 1418.3 (12/29/06) Start: 740.74 (12/31/96) Return: 6%

End: 1248.29 (12/30/05) Start: 615.93 (12/29/95) Return: 7%

End: 1211.92 (12/31/04) Start: 459.27 (12/30/94) Return: 10%

End: 1111.92 (12/31/03) Start: 466.45 (12/31/93) Return: 9%

End: 879.82 (12/31/02) Start: 435.71 (12/31/92) Return: 7%

End: 1148.08 (12/31/01) Start: 417.09 (12/31/91) Return: 10%

End: 1320.28 (12/29/00) Start: 330.22 (12/31/90) Return: 14%

Picking stocks as the author alluded to will probably make the actual results
much worse.

I think it's generally irresponsible to give one data point and an
oversimplified statistic about average annual returns to financially
vulnerable students. Especially considering that the authors approach would
essentially be a levered bet. Tax implications aside, if you're paying 3-6%
interest on your loans, paying them off is a guaranteed return. Compare that
to the appropriate risk-free benchmarks and you'll see that it's definitely a
smart decision to payoff the loans as soon as possible.

Few notes, returns calculated are continuous compounding although I don't
think student loans are continuously compounded. Also, I chose year end dates
for convenience, although I'm sure if you took other dates, your results would
vary greatly (but that's sort of my point)

