Yesterday on Facebook I posted a link about this recent article, How to Borrow Your Way Out of a Student Loan Default and Lower Your Payment. I thought the article was filled with some really important advice about how to get your federal student loans out of default and avoid being sued, having tax refunds intercepted, or wages garnished. One of the comments really left me puzzled. The comment, “You’re an idiot.” When pressed why I was an idiot, and I’m not denying I’m not, was that common refrain I hear that it is impossible to borrow your way out of debt. Admittedly that is a refrain I used to utter decades ago before consumers had options other than just their banks.
I don’t care who the popular financial guru might be; Suze Orman, Clark Howard, or Dave Ramsey. Not every sound bite is universally applicable. Fans get a lot of good information but they must evaluate the advice in context to their lives.
Dave Ramsey repeatedly utters the phrase, “You can’t borrow your way out of debt.” – Source
Ramsey’s advice is, “The answer is not the interest rate; the answer is a Total Money Makeover. The way you get out of debt is by changing your habits. You need to commit to getting on a written game plan and sticking to it. Get an extra job and start paying off the debt. Live on less than you make. It is not rocket science, but it is emotional, which is why most people need help getting through it from someone like Dave Ramsey. Don’t try debt consolidation!”
I completely understand the reason for that advice. If someone trades a worse loan for a debt, it makes the debt worse. Even the example Dave gives is about the perils of a loan where the math doesn’t add up. But what the advice misses is what if the math does add up?
People can call me an idiot as often as they want, and they do because I sometimes give advice that is contrary to the sound bites heard on popular shows like Dave’s. And why is that advice contrary? Because I try to give real advice and not just go with the flow.
I’m afraid the blanket belief that you can’t borrow your way out of debt is the real idiotic statement.
Clearly, if a 24% loan is replaced with a 9% loan and the overall repayment is less with the replacement loan, that’s not a bad thing to consider. You can borrow your way out of debt. The math shows us it is possible.
Take another scenario, how about the fellow that Ramsey says needs to stop eating out, work harder, get a second job, live a lower standard, etc. to pay off his debt and try to get by. But rather than do that, what if the fellow got a debt consolidation loan and borrowed $20,000 to settle his $40,000 worth of debt and make his creditors happy?
Yes, you can actually borrow your way out of debt with a debt consolidation loan at times.
The hardcore Dave Ramsey fans seem to think it is dishonorable to repay your debt outside of what you entered into originally. It is almost as if they are taking a moral stand that they need to suffer their way out of debt. Why do they have to intentionally and needlessly punish themselves?
Let me ask you this, if a creditor willingly offers to accept 50% of the balance in place of the full balance owed, who is displeased? Eliminating that debt quickly returns you to a position where you can begin saving rapidly for retirement so you can build that wealth for when you will most need it. You have not screwed over the creditor, they mutually agreed to the deal. The math all adds up.
All I ask is for you to think for yourself, do the math, and make an educated decision before you believe what anyone says, including myself.
And for the record, this isn’t the only part of Dave’s advice that leaves me scratching my head, see this.
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