Pay off student loans or DVC in full?

[Starport Seven-Five]

Figure out if you could reasonably expect a higher or lower rate of return on investing the money than your loans are accruing interest.

For example, what can you expect to get as a return on any investments? It might be better to invest the entire amount and keep paying off the loans.

One minor point here to make sure you're factoring in the impact of taxes. Earning 4% on a HYSA ends up being less than that because it is taxed at your top federal/state income tax bracket. 4% interest you're paying on a loan is post tax dollars.

Not even Dave Ramsey would argue that if you stick to either plan the snowball will save you money compared to the avalanche. He can do math. His argument (which I agree with) is you are more likely to actually complete the snowball compared to the avalanche. In turn, you will actually get out of debt, and therefore save money in the long run and in the future.

Considering Dave's recent comments about 8% withdrawal rates being safe, I'm not sure we can assume he can do math anymore.

I teach corporate finance at a university for a living, and as part of that I teach (and study) behavioral finance. The fact is people are not rational with money (exhibit A: borrowing money at over 10% for a timeshare). Therefore, most people should just go straight to the snowball. Unless they want to live with debt, in which case it doesn't matter.

I think people should at least bucket their debts. When we're talking interest rates that are a couple percent difference the snowball vs avalanche is not a big deal but It is offensive IMO to tell someone to pay down a 2k car loan at 3% while they have 4k in credit card debt at 18%.

 

[Arguetafamily]

I would pay off the DVC - especially if the loans are Federal Student Loans and not private.

Federal student loans have so many tricks and ways to reduce or even eliminate your payment for a period of time if you get into trouble. You can get deferments, move to income based repayment plans, get a forbearance, or perhaps take a new job which qualifies for one of the several loan forgiveness programs that exist.

DVC loan is going to continue to be that monthly payment until it is paid off.

That’s exactly what it is, federal student debt. Since I have it in deferment until 2029. I will apply both of the DVC I just paid off, about $1000 per month to the student debt. I will pay it off in two years, with the Disney loans it was 10 years, that was with paying the minimum’s which was $1000.

I see it as relieving myself of HAVE to payments. If I happen to need it for something else or life happens, which it always does, I have some wiggle room.

 

[Brob2132]

One minor point here to make sure you're factoring in the impact of taxes. Earning 4% on a HYSA ends up being less than that because it is taxed at your top federal/state income tax bracket. 4% interest you're paying on a loan is post tax dollars.


Considering Dave's recent comments about 8% withdrawal rates being safe, I'm not sure we can assume he can do math anymore.

I think people should at least bucket their debts. When we're talking interest rates that are a couple percent difference the snowball vs avalanche is not a big deal but It is offensive IMO to tell someone to pay down a 2k car loan at 3% while they have 4k in credit card debt at 18%.

I’d assume anyone that can do basic math would not pay the 3% first regardless of psychological impact.

 

[Ursula J]

deleted, off topic

 

[ray3127]

One minor point here to make sure you're factoring in the impact of taxes. Earning 4% on a HYSA ends up being less than that because it is taxed at your top federal/state income tax bracket. 4% interest you're paying on a loan is post tax dollars.


Considering Dave's recent comments about 8% withdrawal rates being safe, I'm not sure we can assume he can do math anymore.

I think people should at least bucket their debts. When we're talking interest rates that are a couple percent difference the snowball vs avalanche is not a big deal but It is offensive IMO to tell someone to pay down a 2k car loan at 3% while they have 4k in credit card debt at 18%.

The 8% withdrawal rate is one of those things I disagree with. He assumes 10-12% returns, so using that as a basis, his math is still correct. But I don't believe those returns are a wise assumption.

Sure, bucket the debts. But even in your very extreme example, depending on how much your payments are and how much you can throw at the debt, the snowball could actually save you money.

If you don't believe me, run the numbers. There's a site called Magnify Money that does this for you (or if you have an Excel problem, like me, you can build your own spreadsheet). So I wouldn't necessarily call recommending the snowball "offensive."

We recently had a little bonus $ and are focused on eliminating our consumer debt. We had $6,000 at 0% and $25,000 at 3%. Call us crazy, but we paid off the $6k. And with that payment now freed up, we are aggressively attacking the $25k. We feel great about it.

I'll say it again: I'm not a Ramsey fanboy or apologist. I don't agree with everything he says. But I also don't understand the naysayers, because overall it is inarguable that he's had a net positive impact on society.

 

[Brob2132]

I’m not an investment guru by any means, but 10-12% is very pie in the sky. You better really know what you’re doing (and I’m certainly not bucketing myself in that).

Most people are best off finding a HYSA, money market account, CD, or ETF depending upon flexibility needed and being happy with the 4-7%.

 

[robinb]

I’d assume anyone that can do basic math would not pay the 3% first regardless of psychological impact.

Even people who can "do basic math" are only human and multiple sources of debt can be emotionally and psychologically debilitating. I hate Dave Ramsey and others of the "Prosperity Gospel" ilk with a white hot passion. BUT ... I'm totally down with his debt snowball idea. If someone drowning in debt can pay off the smallest debt, no matter how high or low the interest rate, then the knowledge of having ONE LESS DEBT is so satisfying that they keep on going. They add the payment from the first debt to the second and so on until all debt is gone.

I decided ultimately to pay off my DVC loans, use those amounts, to pay my student loan. If they get zero out due to politics, great, if they don’t, that’s okay too.

I don't get a "drowning in debt" vibe from the OP and I don't know if she has smaller debt balances, so in her case she made the right decision to pay off the debt with the highest interest rate. It also appears that she will add the amount that she was paying to DVC into her student loans to pay them off more quickly. WTG @Arguetafamily! Enjoy your DVC vacations.

 

[Brob2132]

Even people who can "do basic math" are only human and multiple sources of debt can be emotionally and psychologically debilitating. I hate Dave Ramsey and others of the "Prosperity Gospel" ilk with a white hot passion. BUT ... I'm totally down with his debt snowball idea. If someone drowning in debt can pay off the smallest debt, no matter how high or low the interest rate, then the knowledge of having ONE LESS DEBT is so satisfying that they keep on going. They add the payment from the first debt to the second and so on until all debt is gone.



I don't get a "drowning in debt" vibe from the OP and I don't know if she has smaller debt balances, so in her case she made the right decision to pay off the debt with the highest interest rate. It also appears that she will add the amount that she was paying to DVC into her student loans to pay them off more quickly. WTG @Arguetafamily! Enjoy your DVC vacations.

I didn’t say I’m against the debt snowball idea. I actually said the opposite in the threads. Nor did I comment about the OP’s financial situation, as I have no idea nor do I have the right to comment on his/her finances.

But when you use an example of 2K at 3% or 4K at 18%, it doesn’t matter what philosophy you subscribe to. If you pay toward the 2K first that’s a terrible financial decision. I’ll end my discussion on this post.

Congratulations once again on paying off a debt.

 

[we"reofftoneverland]

One minor point here to make sure you're factoring in the impact of taxes. Earning 4% on a HYSA ends up being less than that because it is taxed at your top federal/state income tax bracket. 4% interest you're paying on a loan is post tax dollars.


Considering Dave's recent comments about 8% withdrawal rates being safe, I'm not sure we can assume he can do math anymore.

I think people should at least bucket their debts. When we're talking interest rates that are a couple percent difference the snowball vs avalanche is not a big deal but It is offensive IMO to tell someone to pay down a 2k car loan at 3% while they have 4k in credit card debt at 18%.

I absolutely love Dave Ramsey. He is doing an incredible public service (I know he makes money doing it but still), but I don’t agree with all of his advice. For example, he says don’t invest in single stocks— for the most part that is good advice, but I don’t think it is 100% the way to go. But the snowball method is a no brainer. I agree with @ray3127 that people don’t make rational decisions when it comes to money. It is emotional and behavioral. Many, many studies discuss this— it’s not just a Dave Ramsey thing. But also the snowball method frees up money by getting rid of monthly payments one by one which actually makes it possible for people to tackle debt. If you don’t have any extra money every month— you never make progress with debt.

 

[we"reofftoneverland]

I didn’t say I’m against the debt snowball idea. I actually said the opposite in the threads. Nor did I comment about the OP’s financial situation, as I have no idea nor do I have the right to comment on his/her finances.

But when you use an example of 2K at 3% or 4K at 18%, it doesn’t matter what philosophy you subscribe to. If you pay toward the 2K first that’s a terrible financial decision. I’ll end my discussion on this post.

Congratulations once again on paying off a debt.

I love the snowball but agree I would pay the 4k first in this case because both are small debts. But for someone who finds these debts insurmountable, that person is probably better off paying the 2k first to have a win.

 

[TheDailyMoo]

I teach corporate finance at a university for a living, and as part of that I teach (and study) behavioral finance. The fact is people are not rational with money (exhibit A: borrowing money at over 10% for a timeshare). Therefore, most people should just go straight to the snowball. Unless they want to live with debt, in which case it doesn't matter.

I have absolutely no idea why high schools aren't mandated to have financial literacy classes. Heck start even earlier in junior high. Such a large percentage of the general public puts themselves behind the 8 ball financially before they've even really begun adult life. It would behoove us all if more people were taught how money works and how to properly set yourself up for future success. If they then want to go and run up huge debt well at least that's what they want to do and fully understand the ramifications.

 

[gmi3804]

But when you use an example of 2K at 3% or 4K at 18%, it doesn’t matter what philosophy you subscribe to. If you pay toward the 2K first that’s a terrible financial decision.

Totally agree. But I don’t know why we should expect someone who, of their own free will, decided to go further into debt they can’t reasonably pay back (so they can spin in a teacup whenever they want) to suddenly acquire the financial acumen of an economist. Such people are all but doomed to never succeed, but are also the backbone of a strong economy which encourages frivolous spending and debt acquisition.

 

[crvetter]

But I also don't understand the naysayers, because overall it is inarguable that he's had a net positive impact on society

This is probably the only issue with what you said. That’s nearly impossible to quantify and some of the advice he gives (especially the non-financial points) can be down right harmful to people.

I agree with you that snowball can manipulate (don’t mean this negatively) people, I even acknowledged that in my posts, by making them see attainable goals when everything feels unattainable. Which really is the point. My issue is he isn’t teaching financial literacy he is teaching a dogma of his way is the right way. Like telling people to get rid of credit and do manual underwriting for mortgage lending being one of the largest, which I can guarantee you leads to higher rates and limits your lenders willing to lend.

Edit: I suggest watching some of John Oliver’s pieces on Dave Ramsey and timeshare exit company scams. Which Dave doubled down on not being scams after the company stole tons of money. He is far from a net positive in my book to helping people. He professed a political and financial dogma with little regard to personal situation and thinks he doesn’t stink and has a hard time admitting fault.

Or his rants that work from home workers contribute less to the work force. There are handful of others I could highlight but then I’d have to watch his show more, something I feel I can’t support.

 

[Starport Seven-Five]

I’d assume anyone that can do basic math would not pay the 3% first regardless of psychological impact.

I want to agree but Ramsey is very dogmatic in his approach. You're either following his methods or you're not. There is no room for deviation or customization.

The 8% withdrawal rate is one of those things I disagree with. He assumes 10-12% returns, so using that as a basis, his math is still correct. But I don't believe those returns are a wise assumption.

The problem is "averaging" market returns in his assumption because the market goes up and down. You might have 2 years of -10% followed by a couple +15% years. When you're pulling money out of the portfolio the sequence of returns matters and why a lower withdrawal rate is assumed by financial planners.

This is kind of basic retirement planning stuff so it's weird to see him fall on his face in this area. The whole "math nerds" criticism from him towards people who do run these numbers as well was ridiculous.

If anyone is interested in a point by point breakdown of how bad the 8% withdrawal rate is, ERN has a fantastic blog post about it:
https://earlyretirementnow.com/2023/11/12/dave-ramsey-8-percent-withdrawal-rate/

Sure, bucket the debts. But even in your very extreme example, depending on how much your payments are and how much you can throw at the debt, the snowball could actually save you money.

If you don't believe me, run the numbers. There's a site called Magnify Money that does this for you (or if you have an Excel problem, like me, you can build your own spreadsheet). So I wouldn't necessarily call recommending the snowball "offensive."

At 2k and 4k the difference is small but there are definitely situations where people have 15k car loans and 20k in credit card debt where it wouldn't be. My only argument is that people should run the numbers for their individual situation instead of just doing what Dave says.

We recently had a little bonus $ and are focused on eliminating our consumer debt. We had $6,000 at 0% and $25,000 at 3%. Call us crazy, but we paid off the $6k. And with that payment now freed up, we are aggressively attacking the $25k. We feel great about it.

I'll say it again: I'm not a Ramsey fanboy or apologist. I don't agree with everything he says. But I also don't understand the naysayers, because overall it is inarguable that he's had a net positive impact on society.

"Net positive" is going to be difficult to prove. I think he has some harmful advice (pausing contributions to 401k being a major one) and his followers have an unhealthy obsession with debt. You shouldn't feel any different with 6k in the bank and a 0% loan than you do with that 6k debt paid off... but I constantly hear from Ramsey followers about "financial peace", the debtor is slave to the lender, and how the grass feels different when you own it fully. Those are self imposed psychological things and putting that stress into your life is not positive.

Overall, I view his financial advice similar to a coworker giving me directions. If I follow them will I eventually get where I'm going? Yes. Would I get there quicker if I followed google maps which customizes my directions to my specific scenario to take into account live traffic and road closures? Also yes.

 

[Anthony Vito]

The original poster already made her decision, so this is less relevant, but I wanted to add one additional consideration for anyone who might be reading this and be in a similar situation. Keep in mind that there could be a slight benefit with some jobs to having student loans. Probably not the case for OP, but people can change jobs as well (this only became something for me when I changed to my current job).

My job pays me an extra $3k a year to use towards student loans ($250/month). I have to actually have student loans with monthly payments that exceed $250/mo. to get this benefit. So, if I had the ability to adjust my student loan payments to $250/mo., that would be ideal because I wouldn't have to use excess money towards payments and could just keep the benefit for as long as needed to pay off the loans (obviously more complicated than that and requires never changing jobs again). Also, between having student loans and getting this benefit or not having them at all, not having the loans is clearly better. However, when determining whether it's better to have a student loan payment or another loan payment, this would factor into the equation for me.

Heck, this doesn't even take into account things like public interest loan forgiveness (working government or public interest jobs), etc. that can forgive remaining student loan balances if working a government job or non-profit job for 10 years (also more complicated than that since it requires a 10-year repayment plan so would have to be on income based repayment for at least some of the repayment period to lower the payments below the amount that would just pay it off in that time).

 

[Mackenzie Click-Mickelson]

Heck, this doesn't even take into account things like public interest loan forgiveness (working government or public interest jobs), etc. that can forgive remaining student loan balances if working a government job or non-profit job for 10 years (also more complicated than that since it requires a 10-year repayment plan so would have to be on income based repayment for at least some of the repayment period to lower the payments below the amount that would just pay it off in that time).

The above is actually one of the biggest issues with the whole student loan biz. Those are the loans (aside from for-profit schools) that are largely getting forgiven because they were BAD programs that were never done well. It used to be just easily explained by you pay 10 years, etc but it's been well publicized that the whole thing was corrupt, underfunded, poorly implemented, etc. The other type of loans that have been forgiven in large amounts in the last several years is the income-based ones because again those were BAD programs in large part and servicers would at times put people in them that would increase their payments.

Just under a week ago $1.2 Billion in student loans were forgiven that were under an income-based track.


There's been a lot of tweaking in recent years but I would not discuss it in terms of general advice because people need to get the information on their own relative to the current process on how to do it. That old advice of loan forgiveness, especially public occupation based, is unfortunately not as easy as people think it was and it was sold to the public as easy peasy too.

 

[Brian Noble]

Once that was paid off I would then take your DVC payment and add that to pay the principal of whatever had the next highest apr.

This. And I would do that even if the next highest loan is the educational debt that is currently in deferment. The reason: I am already used to living on what I have right now, so it will be no hardship to keep doing that. But, if I get used to having more money in my pocket, it is always harder to give up something I am used to.

 

[crisi]

Respectfully, your financial planners are lying to you to get you to invest with them so they can collect fees.

You're not risk-adjusting your hypothetical scenarios.

Investing might yield 10% annually in the long run but there are RISKS associated with those investments. When you pay off debt at 8% interest, you're avoiding 8% interest expense guaranteed. There is no competent financial planner anywhere on the planet who wouldn't sell every asset they own to get an 8% guaranteed return.

The math gets squishier if you're talking about paying off a 5% car loan or a 2.5% mortgage early, but there's absolutely no ambiguity when we're talking about APRs up around 10%.

THIS

I haven't paid off my 4% mortgage because I do better in the stock market....But its a 4% mortgage. But once you get into interest rates on debt that are above 8% - and arguably much lower - pay off the debt instead of investing.

And you are right on mathematically paying the largest interest rate off first - although there is a psychological benefit to knocking off a bunch of smaller debts and feeling like you are making better progress. But not if those debts are consumer - those just tend to come back without a lifestyle change.

 

[3rd_time_the_charm]

This has probably been stated as I only read pages 1 and 4. But God forbid you tank, it is extremely difficult to discharge student loans.

 

[TheLyinKing]

This. And I would do that even if the next highest loan is the educational debt that is currently in deferment. The reason: I am already used to living on what I have right now, so it will be no hardship to keep doing that. But, if I get used to having more money in my pocket, it is always harder to give up something I am used to.

Yup. Once you start accounting for that extra money in your budget each month, even if you intend to save it, it rarely works out that way. My wife and I have to "pretend" that raises/bonuses just don't get applied to our budget spreadsheets so we aren't tempted to use it. Lifestyle creep is real.