Olivia from Tulsa, Oklahoma, called into The Ramsey Show to ask for advice on whether her husband should take on more student debt to pursue an additional degree that could more than double his income potential.
The husband just earned a nursing degree and is set to make approximately $100,000 a year, including overtime. He wants to go back to school for three years to get a doctorate in nurse anesthesia, which could net him a $250,000 yearly income, but tuition would cost $125,000. Meanwhile, the couple already has $200,000 in student loan debt, owns a car that will need replacing in the near future and are trying for a baby.
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Co-hosts Rachel Cruze and Jade Warshaw urged the couple to pay down their debt as quickly as possible before taking on any additional loans, even if it would eventually increase their income substantially.
“Go work your tails off,” Cruze said in a clip posted Aug. 23 [1]. “Get this paid off and then continue to live on nothing to save up $125,000 and take him through the program.”
Olivia has a graduate degree in art therapy, but isn’t licensed in the state, noting it would require overcoming a number of hurdles. For now, she kicks in $900 a month working as a part-time nanny. But the co-hosts recommended she find a job — any job — to help tackle the couple’s debt.
“If she starts making $50,000, that means you’re making $150,000,” Warshaw noted. “But if you live on half … That means you’re putting the other $75,000 towards your debt, minus taxes.”
The hosting duo estimated the couple could be debt-free in two and a half years. Cruze applauded them for dreaming big, but added that dreams like these cost money.
Pay off loans or invest in the future?
Hosts of The Ramsey Show frequently prioritize getting out of debt above all else. This allows you to free up your income and start building wealth faster, putting you in control of your finances.
According to the Education Data Initiative [2], the average federal student loan balance is $39,075. Let’s say you have a student loan debt balance of $40,000, with an interest rate of 6%, at age 22. By paying $240 per month toward the loan, you would be debt-free in 30 years — while also shelling out around $46,000 in interest for a total of $86,000.
But after eight years of payments, you decide to get serious about investing in retirement. Should you start setting money aside while paying off the loan or aggressively pay off the debt first?
Read more: How much cash do you plan to keep on hand after you retire? Here are 3 of the biggest reasons you’ll need a substantial stash of savings in retirement
If you continue to pay off the loan regularly while investing an extra $240 every month in an S&P 500 index fund — and once the debt is paid off, adding the amount to your investments ($480 total) — assuming an average annual return rate of 10% on your investments, after 37 years at age 67, with compounding interest, you will have raised around $1 million, minus the amount paid toward the loan.
Now, if you decide to go the beans-and-rice route to paying off the loan quickly and instead put an extra $480 per month toward the principal ($720 total), you could pay it off in a little over four-and-a-half years rather than 20. Afterwards, if you dial things back and invest $480 per month, assuming the same rate of return as above, in just over 32 years, at age 67, you will have around $1.2 million — a significant difference. And that’s without considering any pay raises that could increase your contributions.
Paying down debt while looking down the line
Dave Rasmey is the founder of Ramsey Solutions, a personal finance education resource. His 7 Baby Steps program advocates putting debt repayment first, then bolstering your finances by building a solid emergency fund before setting your sights on investing for retirement.
Here are some budget figures that his daughter and The Ramsey Show co-host, Cruze, recommends [3]:
- 25% on housing: While some experts put this figure higher, keeping your housing costs low ensures that you have more room in your budget for savings and unexpected expenses.
- 15% on retirement savings: As part of the 7 Baby Steps, putting 15% of your income towards this category helps ensure a healthy nest egg down the line.
- 10% on charities: Whether it’s tithing to the church or supporting a good cause, setting aside a portion of your income for giving, if affordable, can be a positive thing.
- 5% on miscellaneous: The only way to prepare for unexpected expenses is to expect that they’ll come along eventually, so it can be a good idea to create a category like this in your budget just in case.
As for Olivia, if she words together for her husband, she has a shot at a solid financial future.
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[1]. The Ramsey Show Highlights. “In Over $200,000 Of Debt and Don’t Know Where To Start”
[2]. Education Data Initiative. “Student Loan Debt Statistics”
[3]. Ramsey Solutions. “How to Determine Budget Percentages”
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