My “insane” financial plan

Inside Higher Ed has published an expanded version of my post on grad school financial planning. I took the opportunity to make sure people knew that I was living an austere lifestyle and trying not to go into debt for ongoing expenses unless absolutely necessary and to take into account objections people raised in comments, as well as to integrate the material about non-academic side-jobs that I simply linked to in the original post.

I find the reaction to this post interesting, because it seems like for many people, there’s a visceral, gut-level response that says, “No!!!” Sometimes people dismiss my plan as insane and unworkable (even though I’m recounting “best practices” from what I actually did for several years), and sometimes they simply reassert familiar bromides about debt (use credit cards only for emergencies, use debit cards so you don’t spend more than you have, etc.), with no acknowledgment that I take them into account and find them wanting in the post itself.

I understand that a lot of people have a much more destructive experience of debt, and I also understand that some people’s credit ratings have been wrecked by circumstances beyond their control (medical emergencies, etc.) and that they simply don’t have access to the credit I had access to. But it’s not as though I entered into this lightly. When I started, I was angry with myself every time I had to carry a balance month to month, and I found it deeply upsetting when I really had to face the fact that I wasn’t going to be able to pay my debts off until long after grad school — and would almost certainly run them up further. These weren’t hypothetical strategies I developed as I calmly contemplated various credit card agreements — they were emergency measures that became the norm as I discovered that they gave me some kind of space to maneuver.

We all have to turn the corner and stop being moralistic about debt. No one should enter into debt lightly, because it increases your vulnerability — but the greatest vulnerability of all is not to have access to credit. Consumer credit is not a moral failing or temptation, but a necessary structural feature of American society. As long as America as a whole has a huge trade deficit (we buy more from abroad than we sell), then the domestic sectors as a whole are going to have to engage in deficit spending. The financial sector exists to intermediate these various imbalances, and it has used various strategies to keep kicking the can down the road (backing up consumer debt with illusory rising housing prices, for instance, which I’m sure they’ll do again as soon as possible). It would be awesome if policymakers would strike a different balance or if the corporate sector chose to give us access to that spending power in the form of wages instead of debt, but none of us individually has any control over that.

Without access to consumer debt, the average American’s quality of life would be significantly lower. The same holds for a monomaniacal focus on paying off debt. Strictly speaking, I could be out of credit card debt now. There’s no way my discretionary income has been enough to pay off my student loans so far in my career, but I could be paying them down more aggressively. In fact, now that I think of it, I could probably find side-work that would help to fill the gap.

The problem is that my life would completely suck. I would be sacrificing the livability of my life for the sake of lowering a number on some bank’s computer. People worry about debt making you a slave, but the relentless drive for freedom from debt can be the worst slavery of all. That’s part of what I try to get at when I talk about the balance between increasing your debt load and finishing more slowly — grad students routinely lock themselves into a barely livable dynamic voluntarily, out of a fear of debt.

What’s particularly interesting to me is people’s instinctive preference for student loans over credit cards. The fact is, if you have good enough credit to be able to take on a significant amount of credit card debt in the first place, you have good enough credit to get balance transfers, which result in vastly lower interest rates. You can lock in those rates for multiple years or even in some cases for the life of the loan. Meanwhile, student loan rates are far above market rates currently (6.8%), and it’s unlikely that they’ll come down any time soon given that they are determined by Congress. Plus, I’m just going to point out the elephant in the room: student loans are absolutely non-dischargeable in 99.9% of cases. They can garnish your fucking Social Security checks! For credit card debt, though, there’s this obscure escape clause known as declaring bankruptcy. People do it every day. You can also roll your debt over on more favorable terms, whereas your options are very limited with student loans (which cannot be converted into any other type of debt).

And this is where the moralism comes in: the option of bankruptcy is not accounted for. It’s the same moral pull of debt that hooks people throwing good money after bad when they’re underwater on their mortgage. If only there was some solution to this problem! But there is, and it’s built into literally every mortgage agreement — your loan is backed up by your house, so if you default on the loan, the bank gets the house. Maybe people don’t want to take this option out of a sentimental attachment to their shoddy drywalled monstrosity on a curvy street, but I think the more likely reason is that they would feel ashamed. They don’t want to think of themselves as that kind of person. If they do take the option, they do so with a heavy heart and try to hide it from others — contributing to the very same social pressure that would have gladly had them choose to impoverish themselves for the sake of a number on some bank’s computer.

I wonder if that’s part of the gut reaction to my piece — it’s not just that what I’m advising is unappealling (which I openly admit), it’s the shock that I’m even talking about it at all. Since the financial crisis, it seems like people have gotten more open in talking about their finances, but it’s still a taboo and embarrassing topic. Well, I think we need to talk about it more, because this cloud of mystery is helping no one. And when we talk about it, we need to get past moralistic cliches that presume we’re all ruggedly self-reliant homesteaders.

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11 Responses to “My “insane” financial plan”

  1. danbarber Says:

    I have sentiments similar to yours, for what it’s worth. For grad school, and still today amidst ongoing precarity of employment, i’ve also made use of debt in the ways you’re discussing — which is also to say that it was a turning point for me to get beyond what you call “the relentless drive for freedom from debt.” And no doubt, this is connected to realizing how consumer credit is basically the privatization of the welfare state (not advocating such privatization, but that is “how it is,” and important to take into account).

  2. Nate Crawford Says:

    I would also add that with credit card debt, you can eventually renegotiate through a credit management or debt management service, preferably a non-profit. My wife and I did this and were able to pay the credit card debt we had accumulated (mostly for medical and basic living expenses) down much faster and at a much lower interest rate. However, by entering into the program, we agreed not to take on anymore non-secured debt, i.e. credit cards. But, we had the freedom we needed in grad school and were able to make a quick move to pay off our debt when no longer needed that freedom.

  3. Adam Kotsko Says:

    That’s a good way to think about it. It’s similar to how government-subsidized higher ed has been replaced by individual student loans.

  4. Adam Kotsko Says:

    Isn’t it insane that evil corporations are more reasonable and forgiving than the federal government itself, even though the federal government literally prints money and doesn’t ever need to turn a profit?

  5. Friday Links! | Gerry Canavan Says:

    […] * Adam Kotsko follows up his piece on grad students and credit card debt with some important reflections on moralism in personal finance. […]

  6. b-psycho Says:

    It would be awesome if policymakers would strike a different balance or if the corporate sector chose to give us access to that spending power in the form of wages instead of debt, but none of us individually has any control over that.

    What if we as a class demanded it? As in organized effort to express “stop the debt spiral & bring back the concept of wage growth or else”?

  7. Adam Kotsko Says:

    That would be wonderful.

  8. Alex Says:

    student loans (which cannot be converted into any other type of debt)

    Help me here: if you were to raise a bunch of money at, say, 4%, go to the student loan guy and say “here, I’m paying off the lot with this certified banker’s draft”, you can’t possibly mean they would refuse to accept your money?

  9. Adam Kotsko Says:

    If I declared bankruptcy on the dischargeable debt, I would be in potentially really big trouble for fraud — or the “replacement” debt might not be treated as dischargeable, etc.

  10. Alex Says:

    Ah, I was thinking basically of refinancing it at a lower interest rate than 6.8%, not refinancing into something else and then immediately going bust:-)

  11. Adam Kotsko Says:

    Even if you only eventually went bust and had nothing of the sort in mind when you did the swap, you could still wind up with some serious legal problems.


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