Advice for a recent college graduate?

Economics Economics Questions
1

I haven’t posted here before, though I think I will probably start. I’ve had an interest in Austrian economics for years now, and things seem to really be coming to a head. I’ll explain my situation as best and as simply as I can, and hopefully someone here can tell me if I’ve reached some decent conclusions from it all.

I graduated in May with a B.A. in Political Science. Pretty useless at the moment, but perhaps it won’t always be In any case, it’s useless for the purpose of finding a job in my particular area. I have approximately 12,000 dollars in student loans. The loans are broken up, some have an interest rate of ~2%, other parts of the loan are around 6%.

I’ve been working for a few months and saving as much money as possible. I’ve saved about 5,000 dollars. I may be able to save a few thousand dollars more over the next few months.

I think it’s pretty obvious that there is going to be some inflation. I don’t have the ability to figure out exactly how much inflation there will be, but it’s going to have to be substantial. You can’t just increase the money supply like we have and expect prices to stay the same. Whatever happens, I want to be prepared. Unfortunately, I don’t have a ton of money (like some of you out there) to invest.

So, I guess my question is, what should I do? As far as the student loans, I feel like I’d be better off just making the minimum payment. If we had hyperinflation, those loans would be wiped out. If we had double digit inflation, the balance of the loan would stay relatively the same, and I could pay at some later time with devalued dollars. So it doesn’t seem like dumping my cash into paying those loans off would be a good idea. I don’t feel like I have enough money to invest in foreign stocks. So, one of the best options (at least, as it appears to me) seems to be to buy gold/silver with a percentage of the money I’ve saved. In the worst case scenario, I’d at least have the equivalent of a few thousand dollars saved up.

I’m stressing about this because I don’t want to be left with nothing, basically. Any advice will be appreciated.

2

Let’s say you are paying 6% on a loan. And inflation is around 4%. That is 10% per year.

If you are saving $5k, @ 2%, then you are taking a net 8% annual loss in your purchasing power.

You should stop servicing your student loan debt and pay it off, at least the stuff at a higher interest rate, instead of hoarding depreciating cash.

Americans have become to comfortable with holding debt long term, never really planning to pay it off. Debt is like being in chains. Planning on hyperinflation to wipe our your debts is naive. Your $5k will also become worthless if that happens.

All the usual tips apply. Work as much as you can, spend as little as you can. Take care of your health, including your teeth. Learn how to eat well if you don’t understand nutrition. Learn how to defend yourself and make sure you exercise. If you buy goods, make sure they are durable and have a lot of utility. Less party dresses, more socks and underwear. Make sure you have a valid passport too.

I’m a guy, but that has been my basic formula for the last 18 months.

Look, if the SHTF, you are going to need your wits, your health and your relationships with friends and family more than a couple ounces of gold.

3

Depends if the loan is pegged to inflation or not… OP didn’t clarify.

4

I don’t think the balance on the loans adjusts for inflation. That’s probably something I need to call the loan servicing company and determine, though.

Agreed, which is why I don’t want to continue saving this money. I want to put most of it somewhere, it’s just a matter of where.

I can definitely understand paying off the highest interest loans, even though I’m not sold on it. The 2% interest rate loans I don’t have a problem leaving as they are.

I’m definitely not comfortable with holding onto debt, but at the same time, I don’t want to use 5,000 dollars (which is still quite valuable) to pay off a loan that might be worth much less in the future. I don’t necessarily expect hyperinflation, I’m just saying that’s the worst case scenario. And, of course I know that the 5k would be worthless if we had hyperinflation. That’s why I would want to have it invested elsewhere so I don’t lose all that money.

Student loans are somewhat different than other loans. I don’t believe it adjusts for inflation. If we were having major inflation, I don’t think the interest rate on the loan would spike, since it’s a fixed rate. For that reason, I would rather pay off balance + any interest that had accrued in a few years with devalued dollars, as I said. A 12000 balance might have yielded 2000 in interest over the course of a few years, but if 12000 then is worth 6000 in current dollars, then I would have made a good decision. So that’s my thinking, and I don’t necessarily know that it is correct.

Done, done, done, and done on the first four things. I’m healthy and fit. I might have to look into the passport thing. I rarely buy things that I don’t need. I know a lot of people suggest stocking up on commodities, clothes, durable goods, that type of thing. I have no place to store that kind of stuff at the moment, though.

I agree, but I want to be in the best possible position when that time comes. That means having things of real value.

As I mentioned, I don’t think it is pegged to inflation, but I’m going to confirm that very soon.

5

What?

6

adjustable rates

7

I don’t think she wants to “hoard depreciating cash”, but buy stocks or gold instead to pay back the depriciated dollar denominated loan later on.

Still, I’m not too sure if this is a good idea. Austrian Economics gives you a solid understanding of what would happen in a free market and what will happen in the long run even in our not so free market, but it’s really hard to predict how things will play out in the next couple of years. The price of gold is half market, half politics. There is no reason to think it won’t be illegal again for a citizen to hold gold in a year or two.

So it seems like a pretty risky endeavor to speculate with your debt. I think i have to agree with liberty student: Just pay back your student loans and be as self reliant as possible.

8

Perhaps. It’s hard for me to imagine a scenario in which the value of the dollar went up, though. And, if it is illegal for citizens to hold gold in a couple years, then S really has hit the F, so to speak. At least with gold, I could move to another country and trade it for local currency.

I understand that this is mostly speculation, but I don’t think it’s blind speculation. If I were to pay off my entire student loan this year, and Austrians turn out to be right…I just lost a ton of money, and I have absolutely nothing to show for it. If I make the minimum payments, and in five years the economy is great and the dollar is strong, then I cost myself a couple thousand in interest payments, but at least I’m not broke.

It’s the difference between being broke/having my savings severely diminished 2-5 years down the line, or having a decent nestegg put away to buy something. Obviously, this isn’t an easy decision to make…but I appreciate all the input so far.

9

I think most student loans are fixed interest rates. If it is, then I would just make the minimum monthly payments. If inflation is as bad as some are predicting, you will probably earn $12,000 in a week in a few years and be able to pay it off.

With your $5,000, buy silver bullion, guns, or food storage. All of those will be worth a lot, until the government just steals them from you.

10

I see what I did now. I shouldn’t have included inflation. It is constant with the loan and savings. My bad.

11

If the loan is worth less, so will the $5000. The loan is denominated in dollars.

So you want to take $5k now, and turn it into an asset that will appreciate later.

It’s your call. My personal approach is work lots, zero debt and no speculation. It’s not very sexy, but I sleep well.

12

You might be right, but your strategy is basically the same as the whole subprime mortage party. You are highly leveraged, betting on your assets to appreciate to pay back your loans. It could work, and for many people it did for a long time, but you should not assume it’s without risk. With hyperinflation we are talking about the survival of the state and I’m pretty positive they will do whatever it takes to prevent that from happening. The confiscation of gold doesn’t exactly sound like SHTF in this context. Ah what a great thing uncertainty is…:slight_smile:

13

Probably some of the best advised one could give. Paying down the student loan means there is less chance for the government to really screw you over, like changing the interest rate to a variable rate.

14

I can see the comparison, but it’s entirely different. I’m not assuming that anything is going to go up in value. With the housing bubble, people assumed that the value of housing would continue to go up indefinitely. It didn’t matter if you couldn’t afford the house, because the appreciation on it was going to pay for itself. The same goes for the internet bubble. Everyone was under the delusion that things would continue to gain value, when in reality, there was no reason to believe that they would.

My situation, I think, is different. I’m not assuming that the dollar will decline substantially. I really don’t know for sure. I think there’s a good chance it will, and that it’s worth planning for and weighing my options. From my perspective, the value of the dollar is - at best - unstable. For that reason, holding onto dollars - especially in a savings account - is pretty unwise. So I need to do something with them. So, for the purpose of moving forward with this, I’ll list what I perceive as some possible risks:

  1. If I pay my loan off now, I spend approximately 12,000 dollars to pay off a loan that I could pay later with devalued dollars. So, if the total interest I would accrue over the 10 years that it takes to pay off the loan is less than the decrease in value of that 12000 dollars over that 10 years, then it would be worth not paying more than the minimum payments

  2. If I leave the money in the bank, I will lose money. If I buy something like gold, or things of actual value, those things will continue to have value in the future, pretty much guaranteed. Maybe I won’t make money, maybe I’ll lose a little money. They aren’t going to become worthless, though. Dollars don’t carry that guarantee.

  3. There’s a possibility that the government could somehow jack up the “fixed” interest rate, or adjust the balance to adjust for inflation, which would be bad

I’m sure. What can they do, though?

I mean, they can try to confiscate it. I think they’ll find that I “lost” it, though.

Is there any precedent for that happening?

15

I don’t think you get it. It is a zero sum game. Your $12000 to pay it off now, will pay it off later too. The only difference is, as the loan becomes worth less, so does your money.

This isn’t the first time someone has brought this reasoning to the forum. No one wants to pay off debt. Everyone thinks the collapsing economy will give them an easier out later. Or that they can speculate more value than the compounding interest. It’s casino thinking IMO.

Minimum payments are a holding pattern. You’re throwing away money each month to keep your debt rolling over. So while you save $5k, have you looked at what it would do to your minimum payments if you reduced your principle by that amount? You could get that money working for you RIGHT NOW by increasing your cashflow, enabling you to save more, faster.

Like I said, it’s your call but I don’t think you’re going to get much encouragement to speculate on this forum. Austrian perspectives generally lead to being fiscally conservative. You ran up a debt, you will have to pay it. The longer you wait, the wealthier your creditor becomes at your expense.

16

You assume here, that the value of the asset you bought is at least stable which is far from certain.

17

I do get it. You would be completely right, if my plan was to hold onto the money in cash rather than pay off the loan. That isn’t the case, though. I’m either going to pay off the debt, or invest in something that will retain its value. I’m not just going to keep putting money in the bank while also paying the minimum payment. That would be asinine. I would buy something like gold coins with my extra money, which I could eventually trade for something else. The whole point is that I want to be out of the dollar, as to avoid declining assets.

I mean, it seems like pretty solid reasoning to me. I’m bringing it here because I want to see if it holds up. My plan all along has been to pay off the entire loan as quickly as possible. I’ve already paid off a third of it. But, when I started thinking about this, and having heard multiple well known Austrians saying that in a hyperinflationary environment, fixed rate student loans could get wiped out or greatly reduced in value, it got me thinking. I want to be in the best position possible.

I’ve already done the calculations. If I only pay the minimum payments, I’ll end up paying about 3,500 dollars in interest over 10 years. So, really, the question is, is 12500 in 2009 dollars worth more or less than 16000 2019 dollars. Answering that question is speculation, yes, but how could we not have that level of inflation? And, if 2 years into this, I see that the economy isn’t getting worse, the dollar isn’t weakening, we all abandon Mises and embrace Keynes, and the government has successfully created wealth for the first time ever, then fine…I just pay off the loan. I sell whatever I invested my money in, gold for instance, and I pay off the loan. I lose maybe 1,000-2,000 bucks, sure. But at least I had my bases covered.

I stand to lose, at most, 3,500 dollars. I stand to gain, uhh…the ability to survive during a severe depression. I understand your perspective, but I’m not like some of you that have been working for years and have had the opportunity to invest and save. I’m starting out with nothing. If you think that Austrian economics has any merit at all, then you should at least see where I’m coming from. From my perspective, paying off my loan now is speculation…a very costly speculation, if Austrians are right. And if my logic holds up, of course.

If by the asset I bought you mean my degree, then that’s basically worthless at this point in time. So, it might not be stable, but it couldn’t really become less valuable. If you mean the loan balance itself, then I’m also not certain. I’m still trying to figure out if there’s any way for the interest rate on the loan to get raised, even though it’s fixed, or if there’s any way for them to adjust the balance based on inflation. Those are two very important factors, and what I can discover about those factors will determine how I proceed.

18

Don’t confuse the opinions of Austrians with Austrian economics. They are not the same thing.

If you already have $5k, and you can reduce the minimum payments, and pay off the high interest loans now, then why would it take 10 years? You could pay this thing off in 3. Maybe even 2 years.

Isn’t that what you have been doing all along?

19

I could probably pay it off by next August, if I wanted to. And, if at that time, I lost my job, and the economy collapsed, I would be on the street. But hey, at least I’d be debt free.

No. Up until a month or two ago, I was putting any extra money (aside from an emergency fund) toward paying off the loan. The last month and a half, I’ve been holding off, because I don’t know what the right decision is. That’s why I’m here. I should probably note that I can’t use the entire 5k…I’ve got to have some set aside for possible expenses.

20

Pay off your student loans as soon as you can.

By getting rid of your debt, you will no longer have to worry about paying anything with interest. It frees you of an opportunity cost you will face in the future anyway. Once your debt is paid off, you begin making investment decisions.

The alternative plan you seem to be proposing is that you invest in something, get returns higher than your debt interest rates, and then pay off your debt and pocket the profits. That seems like a good idea until you realize that there is no guarantee right now anywhere in the market of earning above 6% interest rates. You could invest in commodities, foreign currencies, stocks, or bonds, and hope you earn more than 6%, but it still is a possibility that your investment decisions net you under 6%, in which case you are screwed.

If I were you, I would begin by paying off the 6% debt ASAP. Then, I would hope that in the meantime T-bill rates rise above 2%, so that you can invest in T-bills safely and pocket the difference as you’re paying off your 2% interest debt.