In many households across America, Dave Ramsey is a trusted advisor on all personal finance matters. He dispenses straightforward instructions and a healthy dose of motivation to his followers.
Unfortuantely, the desire to provide clear and concise instructions can lead to incomplete and even bad advice on student loan issues.
Don’t Bank on Student Loan Forgiveness
Dave Ramsey’s advice to not count on student loan forgiveness is solid. Qualifying for programs like Public Service Loan Forgiveness is far from a certainty.
Dave’s advice often discourages or completely ignores loan forgiveness instead of encouraging people to chase forgiveness and have a Plan B.
This youtube clip shows Dave Ramsey at his best and his worst:
The caller in this clip is on the brink of tears for nearly the entirety of the call. Dave does a great job of motivating the caller to move forward and take action. They have a great discussion about alternative career paths.
Where Dave totally misses the mark is that he doesn’t even mention student loan forgiveness. Because graduate borrowers have much higher limits on federal borrowing, his caller likely has almost entirely federal student loan debt. An excellent option for this caller is tax-free Public Service Loan Forgiveness, especially considering the fact that the caller is already working as a teacher.
I’d rather see Dave tell the caller to seriously consider PSLF. If the caller opts for PSLF, he should only make minimum payments on his federal loans. While he is working towards PSLF, he should save everything he can in a Plan B account in case forgiveness doesn’t work out. If forgiveness happens, the caller has a head start on retirement savings. If it doesn’t happen, he can put a huge dent in his debt.
Dave is right that student loan forgiveness isn’t a magic wand. However, forgiveness isn’t a myth either. It is a viable option to eliminate debt, and for many Americans, it might be the best route.
Debt Avalanche vs the Dave Ramsey Snowball
A key tenet of the Dave Ramsey approach to debt elimination is to write down all of your debts from the smallest to largest and to pay off the smallest one first.
This strategy is often called the debt snowball.
Critics of Ramsey like to point out that the mathematically most efficient route is to pay off the debt with the highest interest rate first.
The high-interest debt first approach is called the debt avalanche.
Both strategies have merit. In fact, there is plenty of evidence behind each approach. If monthly payments are consistent, the avalanche method will eliminate debt quicker. However, the benefit of the Ramsey snowball approach is that it motivates people to stick with the plan. At least one study has backed up this claim.
I think both camps are wrong on this issue. There isn’t one approach that is best. Some people will benefit from Ramsey’s snowball, while others will be better off by sticking with an avalanche strategy.
Personal finance is deeply personal. If you know motivation will be a struggle, you should follow Dave Ramsey’s advice. If you have great motivation but a limited budget, attacking the highest interest debt is probably best.
Separating Private Loans from Federal Loans
When readers of this site email me looking for help, my first question is almost always: are these loans federal or private?
Ramsey often doesn’t ask about the loan type because it doesn’t matter in his system. You pay off the small loan first, then move on to the next one.
His approach ignores an important fact: Federal loans are much better loans than private loans.
The obvious benefits to federal loans are student loan forgiveness and income-driven repayment plans, but there are many other important borrower protections. If you become disabled, federal loans are eligible for discharge. Many private loans lack this protection. If you die during repayment, the federal debt is erased. Private lenders may try to collect from your cosigner or estate. The Covid-19 payment and interest suspension is yet another reason federal loans are preferable.
Because of these protections, most borrowers should opt to eliminate their private student loans first.
Where Dave Ramsey Student Loan Advice Falls Short: Nuance Matters
Ramsey’s advice is simple and easy to understand. It helps a massive audience.
The problem with a one size fits all approach is that each situation is different.
Student loan repayment is complicated. There are many different repayment plans, forgiveness programs, and external sources of help. Borrowers don’t need to pay for student loan help, but it does require a bit of research.
If you skip the homework and follow the Dave Ramsey approach, you will eliminate your debt. You just might miss out on some opportunities that would have made things much easier.