Why Dave Ramsey is wrong on student loans (and how to actually get ahead).

Do NOT pay your loans!

I am a big fan of personal finance and financial responsibility, so of course I’ve heard the Dave Ramsey show a few times. Whatever you think of his politics, Dave’s candid no-nonsense approach to helping Americans build wealth and achieve their financial goals is important and deserves a platform. However, Dave’s advice is completely wrong on one particular issue impacting about 43 million Americans: paying down student loans.

I’ve heard many of the more progressive voices write Dave off completely because his message of personal responsibility with money seems to resonate with conservative-leaning audiences and ignore systemic injustices. But there’s much to be learned from the Dave Ramsey approach. Undoubtedly, Dave’s show has helped many households achieve financial success and I’m sure that’s not by accident. Of course there are systemic barriers impacting access to economic mobility for low-income Americans, people of color and others. But barring sweeping reforms to our financial system, there is much that these communities can achieve at the individual level too. That’s why it’s important that public figures deliver the right advice for getting ahead.

Dave Ramsey is an entry-point to personal finance and a resource that should be considered among other perspectives and strategies. Building an emergency fund, attacking debt, saving for retirement and buying a home are all sound general steps that most Americans should take. But do not use Dave as your sole source for financial inspiration because his advice can be a bit rigid and outdated at times. For example, Bitcoin is more than just “funny money,” Dave! And lately, I’ve been distinctly irritated by Dave’s consistently wrong advice on student loans.

Shortly after taking office in January, President Biden signed 17 pieces of executive action including an extension of the federal forbearance period suspending payments and interest for federally-held student loans until September 30, 2021. The purpose of this action was to provide relief for the millions of Americans who are struggling with student loan payments as a result of the economic fallout stemming from the COVID-19 pandemic.

Furthermore, borrowers who are on track for Public Service Loan Forgiveness (PSLF), like teachers, nurses and other public servants, will be particularly benefitted by this forbearance period. PSLF is a federal program that promises student loan forgiveness after 120 qualifying payments while working in an eligible public service field. Borrowers who are enrolled in this program will continue to accrue monthly PSLF credits even though they are not required to make payments on their loans. In other words, not paying their debt during this period will save them money in the long run.

And here’s what Dave gets wrong: irrespective of their individual circumstances, Dave and his affiliates always tell folks to pay off their student loans aggressively and not to trust government promises. While there have been many well-noted issues with federal forgiveness programs like PSLF, these programs have improved over time and there are resources available to help borrowers navigate eligibility and enrollment. Dave is doing his listeners a disservice by not acknowledging this. Rather than just dismissing government programs as ineffective, Dave should help his listeners take advantage of them by connecting folks with student loan experts and the multitudes of free information online.

“People are having their ears tickled about how the government is going to roll through on [a] little horse with the student loan fairy and they’re going to sprinkle dust on people’s student loans and forgive [them].” — Chris Hogan

Plus, whatever you think of the politics of student loan cancellation, I think it’s either naive or dishonest not to acknowledge the possibility of it. Progressive Democrats are ramping up their calls to cancel $50,000 of student debt with Senators Schumer & Warren leading the way. Multiple House Democrats have supported this proposal as well, and just two weeks ago, a coalition of 17 Attorneys General called for $50,000 in student loan forgiveness as well.

While President Biden has been less favorable toward this $50,000 cancellation proposal, as recently as last month he did mention that he would be willing to cancel up to $10,000 in student loan debt via executive order. This action would significantly impact more than a third of borrowers, who owe less than $10,000 on their federal loans.

President Biden plainly stated that “I am prepared to write off the $10,000 debt but not [$50,000], because I don’t think I have the authority to do it.” In other words, Biden reiterated his preference to take action through Congress — but if Congress does not present the President with a cancellation bill, then we may see President Biden use executive action to approve the $10k cancellation instead.

I am not an oracle and I have no way of predicting which, if any, of these proposals will suceed. But with a Democratic majority across the House, Senate and Presidency, there is a strong possibility of us seeing federal action on student loans this year. Therefore, here’s the best financial advice that most Americans should follow: (1) Don’t pay off your student loans during this federal forbearance period, especially if you are on track for PSLF; (2) Instead, pretend that you are still making student loan payments. Take the amount that you would pay each month and put it aside in a high-interest savings account, short-term CD, bonds or if you have a higher risk tolerance, index fund; and (3) if the government does not pass student loan cancelation by September 30, then just apply your saved-up payments to your student loan balance before interest resumes. Hopefully, you should have a little extra too!

Federal student loan forbearance has been available since March 2020 and the average student loan monthly payment is about $393. So if the average borrower had followed the plan above from March 2020 until the end of federal forbearance in September 2021 (19 months), they’d have saved a principal amount of $7,467 plus interest. And if Democrats do succeed in passing student loan cancellation, then those savings could either be applied toward any remaining student loan balance if applicable or go directly toward other financial goals if no student loan balance remains!

This is the best general financial advice for people with student loans (who can afford to save) and I’m not sure why Dave Ramsey would say anything different. Borrowers should also consider enrolling in income-driven repayment plans to lock-in lower monthly payments once repayment resumes in October. I understand that Dave is conservative but even if you don’t support student loan cancellation, you should still position yourself to take advantage of it. Isn’t that something we can all agree on?