Dave Ramsey: Should You Go Back to School or Pay Off Debt?
Dave Ramsey’s YouTube channel has nearly 2.8 million subscribers. The popular financial author and commentator offers real-time advice to those who call into his program, and the questions he’s asked often revolve around paying off debt and going back to school.
While known as a hardball advocate of living off your free cash flow and getting completely out of debt as soon as possible, there are some scenarios in which Ramsey has offered the advice of accomplishing both at the same time. Here are some real-world examples of Ramsey’s advice, along with an analysis of how you can determine if his suggestions might apply to you.
Look at the Arithmetic
When determining whether to go back to school or pay off debt, Ramsey suggests you do the math to see what makes the most financial sense. One of the callers into Ramsey’s show said that she and her husband had $117,000 in non-housing debt, which consisted of $64,000 in student loans, $24,000 in a car loan and $29,000 on credit cards. To go back to school, the caller would need to fork over $12,000 per year over two years, for a total of $24,000, but anticipated earning $60,000 annually once she earned her degree.
For Ramsey, paying the $24,000 to start earning $60,000 made logical sense. But he stressed that the caller and her husband would have to focus on paying down that debt at the same time they were sending her to school. Ramsey anticipated that would add an additional year to their debt payoff schedule but considered that reasonable as long as the couple would commit to using cash flow to pay down their debt and all their expenses, rather than digging their financial hole even deeper.
If You Can’t Work Out the Cash Flow, Knock Out the Debt First
If the numbers don’t make sense for you, or if you can’t finance your lifestyle with your free cash flow, Ramsey says that you must focus on knocking out your debt first. In his system of “7 Baby Steps” that he publishes to help people with their finances, baby step #2 is “pay off all debt (except the house) using the debt snowball method.
With the debt snowball method, you first attack the smallest debt you have, regardless of the interest rates you are paying, until that debt is completely paid off. From there, you pay as much as you can on your second-largest debt, and so on. The idea is that you’ll feel motivated by getting “wins” in your debt-payoff plan, making it more likely that you’ll continue to attack each subsequent debt. Once all of your debts are knocked out, according to Ramsey, at that point you can continue with your schooling.
Which Is the Best Option for You?
Although Ramsey’s principles regarding debt and schooling are sound, it’s impossible for any financial commentator to make a blanket recommendation that applies in the same way to each and every person. This is why you should review Ramsey’s advice and see if it makes sense for you. For example, the math may change if you’re able to transfer your debt to a 0% rate for 18 months.
In that case, you may consider finishing your schooling while interest is not accruing, then using your increased income at the end of the period to pay off that debt. On the other hand, if you’re not anticipating a significant boost in your income after you complete your schooling, it may make more sense to focus on your debt first and then work on getting your degree. Your personal financial situation is likely to have many variables that don’t fit into a neat category, but understanding the principle behind Ramsey’s debt elimination process should help guide your decision.
Final Thoughts
The core of Dave Ramsey’s financial advice centers around his “7 Baby Steps.” These sequential pieces of advice range from saving $1,000 in an emergency fund to paying off all non-housing debt, building an emergency fund, investing 15% in your retirement fund, saving for your children’s college fund, paying off your house early and building wealth and giving. There’s no specific mention of going back to school in those steps, although the potential end result of getting a degree – earning a higher paycheck – will help with all of Ramsey’s Baby Steps.
It’s up for you to decide the balance between investing in a degree for yourself and paying off your debt, but the bottom line is that you should do both, in Ramsey’s view, as long as you can finance all of these things out of your free cash flow and not dig yourself into an even bigger hole.
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