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Why Dave Ramsey Fans Need to Think for Themselves

By on January 13, 2015

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?

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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.

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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.

If you have a credit or debt question you’d like to ask just use the online form. I’m happy to help you totally for free.

About Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

44 Comments

  1. Steve Rhode

    January 15, 2015 at 9:59 am

    Love it. Goes right to my point of thinking for yourself. That is a commentary that someone wrote about me, but what of my views is in question?

    You will find that those pieces were written by others at a time when predatory debt settlement was thriving. You’ll also find that most of those advance fee companies are now gone, targeted by regulators.

    If you really are interested in learning the facts, read https://getoutofdebt.org/the-getoutofdebt-org-and-steve-rhode-faq and https://getoutofdebt.org/about-steve-rhode

    I’ve got the experience to backup my points of view.

    You’ve got to love the quote, “Steve Rhode encourages people in debt to go through a debilitating bankruptcy as an alternative to debt settlement or credit counseling, leading to an even worse debt situation.” It is so untrue. I do encourage people to examine all of their options so they can make a decision based on their situation.

    The attacks you posted seem to target my positions on a former illegal debt settlement industry, but with a little research you will see I’ve been in favor of debt settlement. See https://getoutofdebt.org/18363/what-is-your-position-on-debt-settlement-rich and https://getoutofdebt.org/18989/why-i-love-debt-settlement-and-why-debt-settlement-isnt-going-away

    As far as legal fees, I was sued by a for-profit advance fee model attorney and the case was dismissed by the Court of Appeals. I won.

    You’ve commented on the site and I know your email address. Did you screen fill with popups and was your inbox slammed? I think not because I’ve never done those things.

    • jml

      January 15, 2015 at 10:13 am

      In fact a year ago you did email me and I deleted it I dint care if you have my email or not I won’t be using your services

      • Steve Rhode

        January 15, 2015 at 5:01 pm

        I see that you previously responded to a comment a year ago and the Disqus system emailed you but that is a far cry different than the allegations in the comments you posted.

        I have no services for you to use. I do not sell any products or services and give my books away for free.

    • JML

      January 15, 2015 at 2:28 pm

      I really don’t agree the only way to resolve debt is by paying it to zero and not going into debt again by living below your means and I have seen pop ups when I look at your website and I don’t care if you have my email you won nothing with me and have not persuaded me at all Cash Is King

  2. Amy

    January 14, 2015 at 10:14 pm

    My husband and I are about to close on a home equity loan to repay our substantial credit card debt. I’m not sure what DR would say about this – I’ve read several of his books, but probably wouldn’t call myself a fan – but this will be a HUGE help to us. We’ll save quite a bit on interest charges, and our creditors will receive all of the money we owe them. And the fear of putting our home on the line is motivation to get the loan paid off quickly! Also, I agree with the PF gurus who point out that a change in spending habits must accompany the debt paydown, otherwise the risk exists of getting right back into debt.

    • Steve Rhode

      January 14, 2015 at 11:10 pm

      Thank you for posting your comment. It brings up a number of things to consider and think about.

      The first is by placing an obligation against your home you are increasing the indebtedness against the house and converting unsecured debt to secured debt. And that indebtedness, as you describe, is substantial.

      A home equity loan may be at a lower rate but the actual rate can be much higher when you factor in your risk of the loan creating a bigger burden for you. You also have to look at the time to repay the home equity loan and make sure it is not for longer than the credit card debt. A longer loan at a lower interest rate can cost more than a shorter obligation at a higher rate.

      In order to compare one loan against the other you’d have to evaluate if the home equity loan, including any associated fees, would be less expensive over the life of the loan. If the monthly payment was higher than your combined credit card debt then you could take the same larger payment and apply it to the credit cards to pay them off early. In fact one easy way to pay your credit card debt off early is to take whatever the minimum payment is this month and never reduce it till the credit card debt is paid in full.

      Depending on the equity in your home and the state where you live you might even be able to eliminate your debt through bankruptcy and keep the house.

      Dave has made the observation before that without changing the spending habits, many get back into trouble. But we need to take that further. It would be healthy to first examine why you have this much credit card debt. After all, credit card debt is the symptom, not the problem. Might be worth reading The Fine Art of Getting Out of Debt at https://getoutofdebt.org/63281/fine-art-getting-out-of-debt

      I’m not saying that you should not complete your intended path. I’m just saying there seem to be many issues yet to be considered before knowing this is the best path for you. This calculator might help in your journey as well. http://www.usdrinc.com/GetOutOfDebt/index.php

      As an example, what if you borrowed just half of your debt and eventually settled your credit card debt for 50% of what you owed? Settlement has consequences but it is an option as well. You’d eliminate the cards for half the cost.

      Just things to consider.

  3. tom

    January 14, 2015 at 6:39 pm

    there were times when i was younger when unexpected expenses caused me to accumulate debts that, paid separately, exceeded what i could pay each month. i was fortunate that i had good credit and was able to get good interest rate consolidation loans from my credit union that made my monthly payments manageable. it worked well for me.

  4. Craig Arbour

    January 14, 2015 at 5:02 pm

    As longtime fans of both you and Dave(chicken salad for lunch today). Dave does recommend debt settlement ALL THE TIME. He tells people you can settle for 50 cents on the dollar regularly.

    He also will under certain circumstances suggest someone borrow money. Especially on things like an upside down car loan or IRS debt. If someone is upside down 8k on a 30K car And he can sell it for 24 he might say borrow the difference. As someone else said the key is have a plan to not just repeat the mistakes of the past.

    • Steve Rhode

      January 14, 2015 at 5:04 pm

      Then he should drop the “can’t borrow yourself out of debt lines” on his website and books.

      Good to hear from you Craig.

      • IHE Reader

        January 14, 2015 at 9:33 pm

        Debt consolidation and settlements aren’t borrowing your way out of debt. Consolidation is trading one debt for another (sometimes at a better rate) and settling is a negotiated forgiveness of some debt. One is still on the hook for the remaining debt in both cases.

        • Steve Rhode

          January 14, 2015 at 10:52 pm

          I like this thread. So exciting to talk about these issues. So tell me, where does bankruptcy fall into this equation since it removes most debt, by your definition, nearly instantly. In that case it should be the first solution to consider.

          • IHE Reader

            January 14, 2015 at 11:06 pm

            Bankruptcy is such an extreme. Depending on the type, one either has debts settled away completely (sometimes only after liquidating existing assets) or one goes into some sort of negotiated repayment plan. And that all assumes one is so far in the hole that one can’t possibly get out without the legal help.

            But this is getting away from your flawed arguments that one can borrow oneself out of debt and that we’re always in debt anyway.

          • Steve Rhode

            January 14, 2015 at 11:18 pm

            Bankruptcy is actually not an extreme solution to eliminate debt. I’ve seen so many cases where bankruptcy should be the first option considered, especially in light of the cost of repaying debt at the sacrifice to future retirement savings that will be needed. See https://getoutofdebt.org/50961/the-real-cost-of-credit-counseling

            The vast majority of bankruptcies do not require the sale of any assets and in fact about 75% are Chapter 7 bankruptcies that eliminate unsecured and secured debt in less than 90 days. The vast majority of Chapter 13 repayment plans convert to Chapter 7s or discharge early.

            You can certainly believe you’ve can’t borrow your way out of debt, which you clearly can mathematically do, and you can escape the various types of future debt but there are many who agree with me. I’m happy to agree to disagree.

          • IHE Reader

            January 15, 2015 at 7:42 am

            Steve, can you point me to an example to show that one can borrow his way out of debt mathematically? Your argument seems to imply that one doesn’t need to use one’s own money to get out of debt. We can use other people’s money and not have to pay them back!

          • Steve Rhode

            January 15, 2015 at 8:14 am

            I never said anything about not paying people back. Take this example, a $40,000 balance of credit card debt can be resolved with a $20,000 loan to settle the debt. Or a 24% interest rate consumer debt balance can be paid off for less and faster using a 12% interest rate loan.

          • IHE Reader

            January 15, 2015 at 9:07 am

            DR says one can’t borrow one’s way out of debt. At the same time, he advises just the same things you’ve written. But what you’ve written isn’t borrowing one’s way out of debt because one is still in debt after the borrowing. It is your shorthand that is wrong, not DR’s.

            Trading one debt for another might provide better repayment conditions (lower balance and lower interest rate), but one is still in debt after borrowing from Peter to pay Paul. At the end of the day, one must pay Peter or weasel one’s way out of paying through legal bankruptcy.

          • Steve Rhode

            January 15, 2015 at 9:45 am

            It appears we agree, you can take out a loan to repay the debt sooner, thus borrow your way out of debt using a loan. And bankruptcy is not a weasel way out of debt. It is a strategic solution based on individual circumstances.

          • IHE Reader

            January 15, 2015 at 9:54 am

            Actually we don’t agree. Yes, you can take out a loan to repay debt sooner, but that isn’t borrowing one’s way *out* of debt because one isn’t *out* of debt simply by borrowing and changing the repayment terms. One still has to pay. That is called being financially savvy and showing character by living up to one’s original contractual obligations at the time of purchase.

            Filing bankruptcy is a legal and strategic solution to a problem often used by weasels who lack financial self-control and character. I exclude people who need to claim bankruptcy due to catastrophic medical bills and other unforeseen events.

          • Steve Rhode

            January 15, 2015 at 10:03 am

            I strongly disagree with your weasel statement, and so does DR whose counselors actually refer people to bankruptcy attorneys. There are plenty of examples when situations dictate bankruptcy as a mathematically sound and prudent solution.

            Show me the statistics of the percentage of bankruptcies filed by feckless characters. Need facts, not opinion.

            As far as using a loan to repay your debt under more favorable terms, I’d call that borrowing your way out of debt.

  5. IHE Reader

    January 14, 2015 at 4:45 pm

    A debt is what is left on a bill if you don’t pay it in full. Bills will always be come, yes, but if you pay them in full when they arrive, then you aren’t in debt.

    • Steve Rhode

      January 14, 2015 at 4:56 pm

      Not an accurate statement. If you pay your bill in full when it arrives, you no longer have a balance. But if the bill is for a recurring service or obligation you are still in debt for the bill to come.

      There are many different types of debt besides a past due bill. You can be in time debt, obligation debt, promises debt, etc.

      The term can also be used metaphorically to cover moral obligations and other interactions not based on economic value

      • jml

        January 14, 2015 at 8:23 pm

        I don’t believe your logic is accurate cause if you pay it when it needs paid how can it be debt it’s not debt especially if I am using my money

        • Steve Rhode

          January 14, 2015 at 8:57 pm

          You may be interested in reading a very influential personal finance book, “Your Money or Your Life.” http://www.amazon.com/Your-Money-Life-Transforming-Relationship/dp/0143115766

          If does an excellent job of describing how future obligations are a financial debt that need to be addressed. It also does an excellent job of talking about the concept of time debt and how debt exists in other forms.

          • jmla

            January 15, 2015 at 1:08 am

            We repespectfully disagree you say one never gets out of debt but yet people are paying debts off and getting out of debt and I have to respectfully disagree my future obligations are not debt I am in complete control how I spend my money and I can be stupid with it if I choose and still not have debt but you just want to keep arguing this

          • Steve Rhode

            January 15, 2015 at 8:11 am

            If your definition of debt is only that which is owed by a current statement, then you are correct. Our point of disagreement here is only the reality of a current versus pending obligation which must be repaid with time or money.

          • jml

            January 15, 2015 at 10:40 am

            My obligations are paid I don’t owe anyone we still disagree I do not view upcoming or re occurring things as debt there just expenses you tried to change my point of view 2 years ago it got you nowhere and it’s not going to get you anywhere now and I will always be sticking up for what’s right

          • Steve Rhode

            January 15, 2015 at 5:02 pm

            What is right? Certainly a healthy discussion of new ideas and concept is right. That’s all we are doing here.

    • jml

      January 14, 2015 at 8:21 pm

      I agree with you

      • IHE Reader

        January 14, 2015 at 9:27 pm

        If Steve really believes we’re always in debt, then his self-title makes no sense. He contradicts himself. Do we always have fees for service, bills, and so on? Yes. But we don’t have debt unless we get behind on those or borrow money.

        • Steve Rhode

          January 14, 2015 at 11:21 pm

          Contradicts how?

          • IHE Reader

            January 15, 2015 at 12:07 am

            You call yourself the get out of debt guy yet argue one never gets out of debt.

          • Steve Rhode

            January 15, 2015 at 8:38 am

            What I said was one can never be entirely debt free since future financial obligations create a debt to be paid which you owe with future labor and life energy (“Your Money or Your Life” wording). I do specialize in these concepts and issues surrounding getting out of debt. I’m not the Debt Free Guy.

        • jml

          January 15, 2015 at 1:11 am

          I agree the only way to go in debt is to borrow money to pay our bills or services so on and pretty hard to get behind when you have adequate time to get it back to them it’s just his logic is off

  6. jml

    January 14, 2015 at 2:15 am

    Can’t borrow your way out of debt unless you have plan to never go back into debt after its paid to zero have plan to stop madness borrowing your way out isn’t always the answer and I am loyal to no ones side the only way out of debt is by paying debt off

    • Steve Rhode

      January 14, 2015 at 8:51 am

      Are you ever really out of debt? Once you pay off your consumer debt you are still in debt for taxes, insurance, rent, mortgage, utilities, etc.

      Debt is nothing more than a future financial pledge. Inf act you are in debt to yourself for your retirement.

      • jml

        January 14, 2015 at 10:45 am

        It’s not debt if it’s all ready paid And we view this differently I don’t view living expenses as debt and its always paid first I have heard that logical debate

        • Steve Rhode

          January 14, 2015 at 1:39 pm

          Logically, a debt is not something past due. Anything that requires future labor to pay for an ongoing obligation is debt. So if you owe taxes but pay the taxes before the bill arrives, it was still a forward looking obligation.

          All the taxes and insurance you will owe is an outstanding bill, it’s all debt. Your adequate retirement savings is a debt. Next years school fees are a debt.

          • jml

            January 14, 2015 at 8:20 pm

            I rightfully disagree if it’s paid as soon as you get notice or notice of it I don’t catorogize that as debt you won’t change my logic or point of view those are things your always going to have the difference is I don’t borrow to pay my expenses I don’t care what kind of logic you view this or how you view this I have read some of the negative reviews on your views

          • Steve Rhode

            January 14, 2015 at 9:10 pm

            Which views have a negative review? Please share.

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